-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KGpD5PuxHqfAq0i8kkMK8kfVgrLZ19VEjWROwvNecdJP7Ou/KDGod1h+CO4I27C0 SMW2Nf88VaFM9Fl8Eex1pw== 0000950117-96-001630.txt : 19961231 0000950117-96-001630.hdr.sgml : 19961231 ACCESSION NUMBER: 0000950117-96-001630 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19961227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER COMMERCIAL FUNDING CORP /NY/ CENTRAL INDEX KEY: 0000867713 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 133763437 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18865 FILM NUMBER: 96686819 BUSINESS ADDRESS: STREET 1: 6660 RESODA BOULEVARD CITY: RESODA STATE: CA ZIP: 91335 BUSINESS PHONE: 8187760590 MAIL ADDRESS: STREET 1: 6660 RESODA BOULEVARD CITY: RESODA STATE: CA ZIP: 91335 FORMER COMPANY: FORMER CONFORMED NAME: PCF ACQUISITION CORP DATE OF NAME CHANGE: 19941017 SB-2 1 PIONEER COMMERCIAL FUNDING SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1996 REGISTRATION NO. 333[ ] ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- PIONEER COMMERCIAL FUNDING CORP. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) NEW YORK 6162 13-3763437 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) ORGANIZATION)
6660 RESEDA BLVD. RESEDA, CALIFORNIA 91335 (818) 776-0590 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS AND TELEPHONE NUMBER) GLENDA KLEIN SR. VICE PRESIDENT PIONEER COMMERCIAL FUNDING CORP. 6660 RESEDA BLVD. RESEDA, CALIFORNIA 91335 (818) 776-0590 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ---------- COPIES TO: STEVEN D. DREYER, ESQ. IRWIN M. ROSENTHAL, ESQ. HALL DICKLER KENT FRIEDMAN & WOOD, LLP RUBIN BAUM LEVIN CONSTANT & FRIEDMAN 909 THIRD AVENUE 30 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10112 (212)339-5400 (212) 698-7700 ---------- Approximate date of proposed sale to the public: As soon as practicable after the effective date of the registration statement. ---------- If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
=============================================================================================== CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF BE REGISTERED REGISTERED MAXIMUM MAXIMUM REGISTRATION OFFERING AGGREGATE FEE PRICE PER OFFERING SECURITY(1) PRICE - ----------------------------------------------------------------------------------------------- Units, each consisting of one share of 4,312,500 (2) $1.63 $7,029,375 $2,130.12 Common Stock , $.01 par value (the "Common Stock") and one Five Year Redeemable Class A Warrant (the "Class A Warrants") - ----------------------------------------------------------------------------------------------- Common Stock 4,312,500 (3) n/a --- --- - ----------------------------------------------------------------------------------------------- Class A Warrants 4,312,500 (4) n/a --- --- - ----------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise 4,312,500 (5) 1.63 7,029,375 2,130.12 of Class A Warrants - ----------------------------------------------------------------------------------------------- Representative's Warrants 375,000 .001 375 .11 - ----------------------------------------------------------------------------------------------- Units Issuable Upon Exercise of 375,000 1.96 (6) 735,000 222.73 Representative's Warrants - ----------------------------------------------------------------------------------------------- Common Stock Components of Units 375,000 (5) --- --- --- Issuable Upon Exercise of Representative's Warrants - ----------------------------------------------------------------------------------------------- Class A Warrant Components of Units 375,000 --- --- --- Issuable Upon Exercise of Representative's Warrants - ----------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of 375,000 (5) 1.63 611,250 185.23 Class A Warrant Components of Units --------- Issuable Upon Exercise of Representative's Warrants - ----------------------------------------------------------------------------------------------- Totals --- --- $15,405,375 $4,668.31 ========= ===============================================================================================
(1) Estimated, pursuant to Rule 457(c), solely for purposes of the calculation of the fee due hereunder, on the basis of the maximum offering price is based upon the last sale price of the Common Stock on December 20, 1996. (2) Includes 562,500 Units which the Underwriters have the option to purchase to cover over-allotments, if any. (3) Includes 562,500 shares of Common Stock issuable as components of 562,500 Units which the Underwriters have the option to purchase to cover over-allotments, if any. (4) Includes 562,500 Class A Warrants issuable as components of 562,500 Units which the Underwriters have the option to purchase to cover over-allotments, if any. (5) Pursuant to Rule 416, there are also being registered such additional shares of Common Stock as may be issued pursuant to the anti-dilution provisions of the Class A Warrants, the Representative's Warrants and the Class A Warrant components of the Units issuable upon exercise of the Representative's Warrants. (6) Based upon 120% of the maximum offering price of the Units. ---------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ [LEFT MARGIN OF FRONT OUTSIDE COVER OF PROSPECTUS] INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 27, 1996 3,750,000 UNITS [LOGO] PIONEER COMMERCIAL FUNDING CORP. EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANT ----------------- Each unit ("Unit") of Pioneer Commercial Funding Corp., a New York corporation (the "Company") consists of one share of the Company's Common Stock, par value, $.01 per share (the "Common Stock") and one Redeemable Class A Warrant (the "Class A Warrants"). The components of the Units will be separately transferrable immediately. Each Class A Warrant entitles the holder to purchase one share of Common Stock, at an exercise price equal to the Market Price of the Common Stock, as hereinafter defined. The Class A Warrants are exercisable at any time during the five year period commencing on the date of this Prospectus (the "Exercise Period"). The Class A Warrants are subject to redemption by the Company at any time during the four year period commencing on the first anniversary of the date of this Prospectus and continuing through the end of the Exercise Period, for $.10 per Class A Warrant, upon 30 days' prior written notice, if the closing sale price of the Common Stock as quoted on the principal market on which it shall then be trading shall be not less than 140% of the Market Price per share during any period of 30 consecutive trading days ending on the third day preceding the date of such notice; and further provided that the Class A Warrant holders may exercise their Class A Warrants at any time prior to the redemption date specified in such notice. See "Description of Securities -- Class A Warrants." The offering of Units being made hereby (the "Offering") involves a high degree of risk. SEE "RISK FACTORS" BEGINNING ON PAGE 10. The Common Stock is quoted on the Nasdaq SmallCap Marketsm under the symbol "PCFC." The closing sale price of the Common Stock on such market on December 20, 1996 was $1.63. Prior to this Offering, there has been no market for the Units or the Class A Warrants. Although the Company has made applications for inclusion of the Units and Class A Warrants on the Nasdaq SmallCap Market, and for listing of the Units, Common Stock and Class A Warrants on the Boston Stock Exchange and the Pacific Stock Exchange, there can be no assurance that any of such applications will be granted, or if any of such applications is granted, that an active and liquid market in such securities will develop, or if such a market does develop, that it will be sustained. See "Market for Common Equity and Related Shareholder Matters;" and "Description of Securities - Nasdaq SmallCap Market Listing; Boston Stock Exchange and Pacific Stock Exchange Listing Applications." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -----------------
============================================================================================== Price to Public Underwriting Proceeds to Discounts and Company (2) Commissions (1) - ---------------------------------------------------------------------------------------------- Per Unit $ $ $ - ---------------------------------------------------------------------------------------------- Total (3) $ $ $ ==============================================================================================
(1) Does not include (a) warrants to be issued to LT Lawrence & Co., Inc. (the "Representative") to purchase 375,000 Units, at an exercise price per Unit equal to 120% of the public offering price per Unit (the "Representative's Warrants") or (b) a non-accountable expense allowance payable to the Representative equal to 3% of the gross proceeds of the Offering. The Representative's Warrants are exercisable for a period of four years commencing one year from the date of this Prospectus. The Company has agreed to indemnify the Underwriters against, or contribute to losses arising from, certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses, including the Representative's non-accountable expense allowance, of $ in the aggregate (or $ if the Underwriters' over-allotment option is exercised in full) payable by the Company. See "Underwriting." (3) The Company has granted the Underwriters an option exercisable for a period of 45 days from the date of this Prospectus to purchase up to an additional 562,500 Units, upon the same terms and conditions as the Units being offered hereby, solely to cover over-allotments, if any. If the Underwriters exercise the over-allotment option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------------- These Units are being offered by the several Underwriters named herein on a firm commitment basis, subject to prior sale, when, as and if delivered to and accepted by them and subject to certain conditions. It is expected that delivery of the certificates representing the components of the Units will be made against payment therefor at the offices of the LT Lawrence & Co., Inc., 3 New York Plaza, New York, New York 10004, or through the facilities of the Depositary Trust Company, on or about , 1997. LT LAWRENCE & CO., INC. ----------------- ______, 1997 [INSIDE FRONT COVER OF PROSPECTUS] The Company intends to furnish its shareholders with annual reports containing audited financial statements of the Company, after the end of each fiscal year, and to make available such other periodic reports as the Company may deem appropriate, or as may be required by law. The Company's accounting year ends on March 31. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON STOCK AND CLASS A WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKETSM, THE BOSTON STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." ---------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The discussions contained herein assume that the Company's Certificate of Incorporation has been amended to increase and change the Company's authorized capital stock from 5,000,000 shares of Common Stock to 25,000,000 shares, of which 20,000,000 shall be Common Stock, and 5,000,000 shall be preferred stock, par value $.01 per share. See "Description of Securities. A Special Meeting of Shareholders will be held on January 15, 1997 to consider and vote upon a proposal to authorize such action. The Company, formerly known as PCF Acquisition Corp. ("PCF"), is a New York corporation organized in March 1994 which merged with Pioneer Commercial Funding Corp. ("Pioneer"), a New York corporation in November 1994. In connection with such merger (the "Merger"), PCF, as the surviving entity in the Merger, changed its name to Pioneer Commercial Funding Corp. and became the successor to Pioneer's business as a mortgage warehouse lender. See "The Merger." Unless otherwise indicated, (i) all references to "Pioneer" shall mean the corporation which, prior to the Merger, was known as Pioneer Commercial Funding Corp., (ii) all references to the "Company" shall mean the post-Merger New York corporation now known as Pioneer Commercial Funding Corp. and (iii) all references to "PCF" shall mean the Company, as it was constituted and named prior to such Merger. All information in this Prospectus assumes no exercise of the Underwriters' over-allotment option or the Representative's Warrants. See "Underwriting." THE COMPANY The Company is a specialized niche financial services company currently engaged in (i) residential mortgage warehouse lending and (ii) origination of consumer automobile loan and lease financings through a recently acquired 50% interest in Trans Lending Corporation ("Trans Lending"). Trans Lending presently represents AVCO Financial Services, Inc. ("AVCO"), ACC Consumer Finance Corporation ("ACC") and Norwest Financial, Inc. ("Norwest") who have agreed to purchase auto loan and lease contracts (the "Contracts") acquired by Trans Lending from approximately 60 dealers located in Florida. The Company will seek to enter other specialty financial service sectors primarily through acquisitions of businesses or joint ventures with businesses or executives having extensive experience in the targeted specialty. Mortgage Warehouse Lending Operations. The Company provides short-term (generally 10 to 30 day) financing to small to medium sized mortgage bankers with at least $350,000 of capital who hold ("warehouse") the mortgage loans they originate pending the nonrecourse sale of such loans to institutional investors in the secondary mortgage market such as government sponsored or sanctioned entities, e.g., the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") and/or accredited financial institutions such as banks, thrifts, insurance carriers and large mortgage bankers (each such entity or firm, an "Agency," and collectively, the "Agencies"). The mortgage loans for which the Company provides such financing are primarily single family residences and other owner occupied residential properties including one to four unit properties in which the owner is the occupant of at least one of such units. Generally, the Company's customers do not possess sufficient capital or lines of credit to fully fund all of the loans they originate during the period of time that transpires between the date on which a loan is closed and the date on which an Agency will purchase that loan pursuant to the commitment obtained from it by the customer (the "Agency Commitment Date"). The Company provides its customers with lines of credit that are collateralized by the loans that the Company funds. Those lines of credit enable the customers to warehouse the loans for the period of 10 to 30 days that typically occurs between the closing of a loan and the Agency Commitment Date. During this period, the Company will hold the loan documents (generally, the promissory note and the first deed of trust or mortgage securing the note) and upon delivery of the loan documents to the Agency, the Company is paid the aggregate amount of the loan. The Company manages the risks inherent in its business, and prepares, tracks and confirms the on-time delivery of all necessary documents to the appropriate Agency with its Collateral Tracking System ("CTS"), a proprietary set of computer-based standards, procedures and controls. The CTS programs enable the Company to avoid the problems caused by, and the monetary losses that can result from, the frequent short-term processing deadlines, the high volume of loan transactions and the complex document structures of mortgage loan financing transactions which are integral parts of the mortgage loan warehouse financing business. Between June 14, 1993, the date when Pioneer recommenced business operations upon its emergence from Chapter 11 bankruptcy proceedings (the "Inception Date"), and September 30, 1996, no loan which was approved for funding by the Company failed to close, and every loan which was closed with the Company's funds during said period was sold to one of the Agencies in accordance with the commitments given by them in advance of such closings. Accordingly, the Company suffered no loss of its principal during that period. See "Business -- The Mortgage Loan Process From Application by a Customer Through Funding." Automobile Loan Financing Operations. Trans Lending originates consumer automobile financing transactions for non-prime borrowers (consumers 2 who are typically unable to obtain financing from traditional sources) by acquiring Contracts from franchised and independent car dealers. Strategy. The Company's multi-pronged growth strategy to maximize long-term shareholder values is: . Expanding the scope of the Company's mortgage warehouse lending activities by increasing its available lines of credit and the number of mortgage bankers served. . Developing and expanding Trans Lending's automobile financing activities through its representation of a greater number of banks and other institutional purchasers of auto loans, and through the establishment of Contract acquisition relationships with a greater number of franchised and independent used car dealerships. . Expanding into other specialty finance niche activities primarily through acquisitions of businesses, or joint ventures with businesses or executives having extensive experience in the targeted specialty. . Obtaining commitments from Arthur H. Goldberg, the Company's Chief Executive Officer, and Elie Housman, the Company's President and Chief Operating Officer, to devote substantial portions of their time to the affairs of the Company. The Company's office is located at 6660 Reseda Boulevard, Reseda, California 91330, and its telephone number at that location is (818) 776-0590. 3 THE OFFERING Securities offered.......................... 3,750,000 Units, each Unit consisting of one share of Common Stock and One Class A Warrant entitling the holder to purchase one share of Common Stock for $ [the Market Price] per share. Common Stock currently outstanding................................ 1,442,272 shares (1) Common Stock to be outstanding after Offering........................... shares (1) Use of proceeds............................. The net proceeds of the Offering will be used to increase the funds available for the Company's warehouse lending operations. A portion of such proceeds may be used to enable Trans Lending to engage in the direct financing of auto loan transactions, and as working capital. See "Use of Proceeds." Nasdaq SmallCap Market symbols Units (proposed).......................... PCFCU Common Stock................................ PCFC Class A Warrants (proposed)............... PCFC[A] Proposed Boston Stock Exchange symbols Units .................................... [ ] Common Stock................................ [ ] Class A Warrants ......................... [ ] Proposed Pacific Stock Exchange symbols Units .................................... [ ] Common Stock................................ [ ] Class A Warrants ......................... [ ] Risk Factors................................ The Offering involves a high degree of risk. See "Risk Factors" beginning on page 10.
- ---------- (1) Does not include (a) up to 4,875,000 shares of Common Stock issuable in the event that (i) all of the Class A Warrants are fully exercised; (ii) the Underwriters' 4 over-allotment option is fully exercised; and (iii) the Class A Warrants to be issued in connection therewith are fully exercised; (b) up to 1,056,424 shares of Common Stock issuable upon exercise of various warrants and options which were heretofore granted by the Company at exercise prices ranging from $[ ] to $[ ] (i) in the initial public offering of securities which the Company completed in August 1996 (the "IPO"); (ii) to various officers; (iii) to United the Mizrahi Bank & Trust Company ("UMB"); or (c) up to 750,000 shares of Common Stock the which shall be issuable in the events that (i) the Representative's Warrants are fully the exercised; and (ii) the Class A Warrants to be issued in connection therewith are also fully the exercised; and (iv) up to 700,000 shares of Common Stock which shall be issuable upon exercise of options granted by the Company to Messrs. Goldberg and Housman, subject to approval by the shareholders. See "Management - Employment Agreements;" "Principal Security Holders;" "Description of Securities - UMB Option;" and "Underwriting." 5 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following selected historical financial information relating to the Company for the fiscal year ended March 31, 1996 has been derived from the financial statements appearing elsewhere herein. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and notes thereto and the report of Arthur Andersen LLP, independent public accountants with respect to the Company's financial statements appearing elsewhere therein. The income statement data set forth below with respect to the six month period ended September 30, 1996, and the balance sheet data at September 30, 1996 are derived from the unaudited financial statements appearing elsewhere herein. In the opinion of management of the Company, such unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation thereof. The income statement data for the six month period ended September 30, 1996 is not necessarily indicative of the results which may be expected for any interim period or the full fiscal year. The Proforma - Offering information includes and accounts for the effects of: (a) the payment of the principal of and accrued interest on certain bridge financing loans undertaken by the Company in connection with the IPO; and (b) the anticipated results of the completion of the sale of 3,750,000 Units offered hereby (not including 562,500 Units subject to the Underwriters' over-allotment option) at an assumed public offering price of $ per Unit (after deduction of the estimated underwriting discounts and commissions, and expenses of the Offering). 6 Proforma Statement of Operations Data for the year ended March 31, 1996: (in 000's except for share related data)
Financial Statement Offering Adjustments(1) Proforma Balance IPO Current Offering Balance ------------------- --- ---------------- --------- Income $ 97 $ 97 Costs and Expenses: Direct Costs (174) $ 79 (2) (95) Operating Expenses (434) (110) (3) (544) Total Costs and Expenses 608 ( 31) (639) Loss from Operations (511) (31) (542) Other Income (Expenses) 31 31 Net Loss $ (480) $( 31) $(511) ======= ====== ======== ===== Net Loss per Share of Common Stock $(0.58) $(0.10) Weighted Average Shares Outstanding (4) 826,644 5,192,272 Common and Common Equivalent Shares Outstanding 835,000 607,272 (5) 3,750,000 (6) 5,192,272
- ---------- (1) Offering adjustments do not include the potential earnings impact from the Company's ability to utilize the net proceeds obtained from the Offering in its operations for the year ended March 31, 1996. (2) To eliminate interest expense on the bridge financing undertaken by the Company in connection with its IPO (the "IPO Bridge Financing") which was paid upon completion of the IPO. (3) Incremental payroll expense payable to the Company's chief executive officer and chief financial officer. See "Management - Employment Agreements." (4) Share and per share amounts have been have been adjusted to reflect the effects of a 1:758 reverse stock split which occurred in June 1996. (5) To reflect the effects upon the year ended March 31, 1996 of issuance of (a) 600,000 shares of Common Stock in August 1996 upon completion of the IPO; and (b) 7,272 additional shares of Common Stock issued in June 1996 to certain lenders who had provided part of the IPO Bridge Financing (the "IPO Bridge Financing 7 Lenders"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Bridge Lending." (6) To reflect the effects on the year ended March 31, 1996 of issuance of 3,750,000 shares of Common Stock upon completion of the Offering. Proforma Statement of Operations Data for the six months ended September 30, 1996: (in 000's except for share related data)
Financial Statement Offering Adjustments(1) Proforma Balance IPO Current Offering Balance ------------------- --- ---------------- --------- Income $ 130 $ 130 Costs and Expenses: Direct Costs (163) $ 42 (2) (121) Operating Expenses (219) (46) (3) (265) ---- ---- ----- ---- Total Costs and Expenses 382 (4) (386) ---- ---- ----- ---- Loss from Operations (252) (4) (256) ---- ---- ----- ---- Other Income (Expenses) 7 7 ---- ---- ----- ---- Net Loss $ (245) $ (4) $ (249) ==== ==== ===== ===== Net Loss per Share of Common Stock $ (0.25) $(0.05) Weighted Average Shares Outstanding (4) 996,629 5,192,272 Common and Common Equivalent Shares Outstanding 1,442,272 3,750,000 (4) 5,192,272
- ---------- (1) Offering adjustments do not include the potential earnings impact from the Company's ability to utilize the net proceeds obtained from the Offering in its operations for the six months ended September 30, 1996. (2) To eliminate interest expense on the IPO Bridge Financing which was paid upon completion of the IPO. (3) Incremental payroll expense payable to the Company's chief executive officer and chief financial officer. See "Management - Employment Agreements." (4) To reflect the effects on the six month period ended September 30, 1996 of issuance of 3,750,000 shares of Common Stock upon completion of the Offering. 8 Proforma Balance Sheet Data at September 30, 1996: (in 000's)
Financial Statement Offering Proforma Balance Adjustments Balance ------- ----------- ------- Cash $ 587 $ (1) $ Loans Receivable, Mortgage Warehouse 3,086 3,086 Other Assets 397 --- 397 ------- ------- ------- Total Assets $ 4,070 $ , $ , ======= ======= ======= Loans Payable, Mortgage Warehouse $ 1,582 $ 1,582 Other Liabilities 232 232 ------- ------- ------- Total Liabilities $ 1,814 $ 1,814 ======= ======= ======= Common Stock and Paid in Capital $10,577 $ $ Accumulated Deficit (8,321) (8,321) ------ ------ ------ Total Shareholder's Equity $ 2,256 $ $ ======= ======= =======
- ----------------------------- (1) To reflect the sale of 3,750,000 Units in connection with this Offering at $ per Unit. 9 RISK FACTORS An investment in the Units offered hereby involves a high degree of risk. Prospective investors should carefully consider all of the information in this Prospectus including the following risk factors. LIMITED OPERATING HISTORY; RECENT EMERGENCE FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS; CONTINUING LOSSES; COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN. Pioneer emerged from the protection of Chapter 11 of the Bankruptcy Code in April 1993. Accordingly, although Pioneer was founded in 1980 and engaged in substantial business operations during the ensuing nine year period, the nature and extent of the business that it has conducted since April 1993 are substantially different from the business which it conducted prior to commencement of such proceedings in January 1990. Due, in large part to the limited credit lines that were available to Pioneer upon its emergence from bankruptcy and the time it took thereafter to find and approve two mortgage banking customers, Pioneer only engaged in limited operations during said fiscal year, and incurred a loss of $393,155 for said year. During the fiscal years ended March 31, 1995 and 1996, the Company sustained losses from operations in the amounts of $583,736 and $511,159, respectively. At September 30, 1996, the Company's accumulated deficit amounted to $8,320,936 (including accumulated deficit of approximately $6,602,000 upon emergence from bankruptcy in April 1993). In order to operate profitably in future periods, the Company will need to increase its capacity to fund loan transactions and correspondingly increase loan volume demand. Its ability to achieve such increases will depend upon such factors as how successful the Company will be in acquiring additional lines of credit from its financing sources, and in establishing new customer relationships with others mortgage bankers. The net proceeds which the Company derived from its IPO have enabled it to seek such additional credit lines and to expand its customer base. Since the completion of the IPO in August 1996, the Company has sought new credit lines from approximately 20 banks and other financial institutions. As of the date of this Prospectus, the Company's applications have been rejected by three of such institutions, and are still pending with the others. There can be no assurance that the Company will achieve profitability in the future, if at all. If the Company fails to achieve profitability, it would be materially adversely affected. In this regard, see the Report of Independent Public Accountants accompanying the Company's audited financial statements appearing elsewhere herein which cites substantial doubt about the Company's ability to continue as a going concern. There can be no assurance that the Company will achieve profitability in the future, if at all. See "Business - Pioneer's Chapter 11 Bankruptcy Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Trans Lending commenced operations in December 1996. There can be no assurance that Trans Lending will be able to successfully implement its business 10 strategy or that unanticipated expenses, problems or difficulties will not result in material delays in its implementation. See "Business -- The Company's Acquisition of Trans Lending." POSSIBLE NEED FOR ADDITIONAL FINANCING. Implementation of the Company's growth strategy and future growth of the Company's business may require additional capital. No assurance can be given that the Company will be able to obtain the necessary financing. The Company currently estimates that the net proceeds of the Offering, together with cash generated from operations, will be sufficient to finance its current operations and planned capital expenditures for at least the next 12 months. However, there can be no assurance that the Company will not require additional capital at an earlier date. The Company may, from time to time, seek additional funding through public or private debt or equity financing. There can be no assurance that funding will be available as needed or, if available, on terms acceptable to the Company. If additional funds are raised by issuing equity securities, existing shareholders may experience dilution. DEPENDENCE ON AND INEXPERIENCE OF MANAGEMENT; KEY MAN INSURANCE. Although Messrs. Goldberg and Housman have experience in managing businesses substantially larger than the Company, neither Mr. Goldberg nor Mr. Housman has material experience managing a mortgage warehouse lending business. The Company will be depending on Messrs. Goldberg and Housman to provide managerial supervision and strategic guidance in connection with the conduct of the Company's operations. There can be no assurance that the management provided by Messrs. Goldberg and Housman will result in profitable operations. The Company has applied for key man life insurance coverage on Messrs. Goldberg and Housman. No assurance can be given that such insurance will be issued covering any or all of such persons. See "Management." In addition, the success of Trans Lending's operations is dependent upon the experience and ability of Kenneth Germain, Trans Lending's Chief Operating Officer. The loss of Mr. Germain could have an adverse effect on Trans Lending's business. See "Business -- The Company's Acquisition of Trans Lending." RELIANCE UPON LIMITED SOURCES OF FUNDS; POSSIBLE UNAVAILABILITY OF ADDITIONAL FUNDING SOURCES. The Company's principal source of financing is the warehousing line of credit granted to Pioneer by UMB. This line of credit, in the original principal amount of $2,000,000, has been increased to $4,000,000, and is currently scheduled to expire August 31, 1997. The Company has applied for additional lines of credit with approximately 20 banks and other financial institutions. No assurance can be given that the Company will be able to maintain its existing financing arrangements, or 11 obtain replacement financing as current arrangements expire. Furthermore, if the Company's mortgage banking customers experience difficulty in selling their mortgage loans or mortgage-backed securities, the Company may have to curtail loan warehousing activities, which would have a material adverse effect on the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources;" and "Business." DEPENDENCE ON LIMITED NUMBER OF MORTGAGE BANKING CUSTOMERS. The Company is conducting business with Windtree Financial Corp. ("Windtree"), 1st Financial Corp. ("1st Financial"), Pacific Crest Mortgage Corp. ("Pacific Crest"), National Home Funding Corp. ("Home Funding") and Citizens Mortgage Service Corp. ("Citizens"), as customers. The Company is currently analyzing applications from four other potential customers who originate residential family mortgage loans in Arizona, California, Colorado, Delaware, Florida, Nevada, New Mexico, New Jersey, New York, Oregon, Pennsylvania, South Carolina, Utah and Washington. Although the Company expects to conduct business in the future with a greater number of mortgage banking customers, and thereby reduce the risks attendant in relying upon a small number of customers to support its business, no assurance can be given that it will receive applications from potential customers who will be able to satisfy its standards, or if it does receive such applications, that such applicants will thereafter engage in material volumes of mortgage warehouse lending transactions with the Company. The cessation of business by any customers could materially adversely affect the Company's ability to generate sufficient revenues to operate profitably. See "Business - The Company's Mortgage Banking Customers." TRANS LENDING'S DEPENDENCE ON DEALERS. Trans Lending's business depends in large part on its ability to maintain and service it relationships with automobile dealers. While Trans Lending believes that it has been successful in developing and maintaining relationships with dealers, there can be no assurance that Trans Lending will be successful in continuing to maintain such relationships or in increasing the number of dealers with which it does business, or that its existing dealer base will generate volume of loans or leases sufficient to permit Trans Lending to operate profitably. See "Business -- Sales and Marketing." HIGH RISK OF LOANS AND LEASES ORIGINATED OR TO BE ACQUIRED BY TRANS LENDING. If Trans Lending engages in direct financing activities, its ability to generate profits will depend upon, among other things, its capacity to properly evaluate the creditworthiness of customers and to minimize losses following 12 defaults with the proceeds from the sale of repossessed collateral and with insurance proceeds. Trans Lending has just commenced operations, does not possess a seasoned loan or lease portfolio, and has no prior experience upon which to gauge the delinquency and loss rates which may apply to it in future periods. If Trans Lending engages in direct financing activities, there can be no assurance that the performance of Trans Lending's portfolio will be satisfactory, or that if satisfactory results are obtained, that Trans Lending will be able to maintain such performance, or that the rate of future defaults and/or losses will be at levels that will permit Trans Lending to achieve profitability. See "Business -- The Non-Prime Auto Finance Industry;" and "-- Trans Lending's Business Strategy." CYCLICAL NATURE OF MORTGAGE BANKING INDUSTRY. Mortgage banking firms have historically experienced a wide range of financial results, from highly profitable to highly unprofitable. These financial results are due to many factors which affect most, if not all, firms in the mortgage banking business at about the same time, but three predominate: changes in mortgage interest rates, the availability of affordable credit and the state of the domestic economy. These three factors, among others, affect the demand for new and used housing and thus the demand for financing and refinancing of mortgages. COMPETITION IN THE MORTGAGE BANKING BUSINESS. The business of originating and financing the origination of residential mortgage loans is highly competitive. Certain companies which have longer operating histories and significantly greater resources than those of the Company are engaged in providing multi-state, computer-based bridge financing of residential mortgage loans. Larger established mortgage warehouse lenders are making substantial investments in their computer operations to achieve significant economies of scale and greater flexibility in rendering services. Also, major bank-related organizations like the Mortgage Warehouse Division of Bank of New York, Bank of America, PNC Bank, and other businesses engaged in lending activities, such as CWM Mortgage Holding, Inc.'s Warehouse Lending Corporation of America, The Associates First Collateral Services and General Electric Capital Corp.'s Residential Funding Corporation are entering or reentering the mortgage warehouse financing business. There can be no assurance that the Company will be able to compete effectively with such competitors, that additional competitors will not enter the market, or that such competition will not make it more difficult for the Company to secure a sufficient number of high quality mortgage banking customers to realize its anticipated business growth. See "Business - Competition." 13 COMPETITION AND MARKET CONDITIONS IN THE AUTOMOBILE FINANCE BUSINESS. The non-prime consumer automobile finance market is highly competitive. The level of competition has increased significantly in recent years and this trend is expected to continue. Historically, commercial banks, savings and loan associations, credit unions, captive finance subsidiaries of automobile manufacturers and other consumer lenders, many of which have significantly greater resources than Trans Lending, have not competed for non-prime consumer business. To the extent that such lenders expand their activities in the non-prime consumer market,Trans Lending's financial condition and results of operations could be materially adversely affected. See "Business--Competition." During the past two years, several companies have devoted considerable resources to the non-prime consumer market, including well-capitalized public companies. Specifically, Ford Motor Credit Company has begun to finance non-prime consumers, General Electric Capital Corporation established strategic alliances with several regional non-prime consumer automobile finance companies and KeyCorp acquired AutoFinance Group, Inc., one of Trans Lending's competitors. Other companies, including Mellon Bank Corporation and Southern National Corporation, have also entered the market. Trans Lending's business is also affected by certain demographic, economic and industry trends. These trends include increased sales of used cars, rising new car prices relative to used car prices, stability in non-prime consumers' demand for used cars, the inability of non-prime consumers to find lower cost financing from other sources and the overall level of interest rates in general. A reversal of any of these trends or a change in any of these conditions could have a material adverse effect on Trans Lending 's financial condition and results of operations. See "Business--Competition." IMPACT OF MORTGAGE INTEREST RATE FLUCTUATIONS. Prevailing mortgage interest rates, which have an impact on consumer decisions to obtain new loans or to refinance existing loans, will affect the ability of the Company's mortgage banking customers to originate mortgage loans. In recent years, a declining interest rate environment favorable to mortgage loan originations has existed. Increasing interest rates could cause a decrease in the pool of consumers seeking new or refinanced mortgage loan transactions, and a concomitant increase in competition among mortgage bankers for better quality mortgage loan transactions. Such increased competitive pressures on the Company's customers might force the Company to decrease the amount of the transactional fees that it charges in order to cooperate with its customers' efforts to attract business from the diminished supply of better quality loan customers, and thereby maintain good relationships with its customers. Fluctuating interest rates also may affect the net interest income earned by the Company resulting from the difference between the yield to the Company on a mortgage loan warehoused by the Company and the interest paid by it for funds advanced under its line of credit. The Company's net 14 interest income is comprised of the spread between interest rates on mortgages warehoused by it and interest rates paid on the Company's warehousing line of credit. A decrease in this spread, or a decrease in the amount of the transactional fees which the Company charges its customers, would have a negative effect on the Company's net interest income and its ability to operate profitably. See "Business." RISKS ASSOCIATED WITH ACQUISITIONS. The Company is not currently considering the acquisition of any business, or a joint venture with any other business or individual. From time to time in the future, the Company may enter into negotiations with respect to potential acquisitions or joint ventures, some of which may result in preliminary agreements. In the course of the Company's negotiations and/or due diligence, these negotiations and/or preliminary agreements may be abandoned or terminated. No assurance can be given that the Company will find suitable acquisition or joint venture candidates, or that future acquisitions or joint ventures will be financed and made on acceptable terms, or if completed, that such acquisitions or ventures will be successful. DEPENDENCE ON SECONDARY MARKET SALES; POTENTIAL CHANGES TO AGENCY PROGRAMS. The Company's business will depend upon its mortgage banking customers' abilities to sell new mortgage loans on favorable terms in the secondary mortgage market in order to generate the funds necessary to originate additional mortgage loans. Accordingly, any significant change in the secondary mortgage market such as changes in the operations, programs, levels of activity, underwriting criteria or applicable regulations of any of the Agencies, or in the Company's customers' qualifications as loan issuers, sellers or servicers under such regulations, could impair the Company's ability to warehouse mortgage loans on a favorable or timely basis. Any such impairment could have a material adverse effect on the Company's business and results of operations. See "Business Regulation - Mortgage Warehouse Lending." DEPENDENCE ON GOVERNMENT PROGRAMS. Although the Company is not aware of any plans to discontinue or reduce significantly the operation of programs administered by GNMA, FNMA and FHLMC which facilitate the issuance of mortgage-backed securities, any such action, as well as any reduction or impairment of the Company's mortgage banking customers' continued eligibility to participate in such programs, would have a material adverse effect on the Company's business operations and prospects. See "Business." Similarly, although the Company is not aware of any plans for any of the Agencies to enter the mortgage warehouse lending business, any of these Agencies has the capital, the expertise, and the industry knowledge to enter this 15 business in a significant manner. Furthermore, if any of the Agencies did enter this business, it would constitute very strong competition to the Company in its efforts to secure well qualified customers on terms favorable to the Company. Such an increase in competition in the mortgage warehouse business could have a material adverse effect on the Company's business operations and prospects. See, "Business - Competition." REGULATION AND REGULATORY CHANGES - MORTGAGE WAREHOUSE LENDING. Although mortgage loan warehousing is not presently subject to federal regulation, the California Finance Lenders Law went into effect July 1, 1995. That law imposes licensing obligations on the Company, requires the filing of annual and periodic reports, establishes maximum interest rates and repayment terms in certain cases, and provides for fines and imprisonment for violation of the law. Other participants in the mortgage warehouse financing process, such as title companies and appraisers, also may be regulated by the states in which they reside and such regulations often determine the scope and approach of the Company's collateral control monitoring program. Furthermore, mortgage banking is a highly regulated industry. The Company's mortgage banking customers are subject to the rules and regulations of, and examinations by, the Federal Housing Administration ("FHA"), the Veterans Administration ("VA"), GNMA, FNMA, FHLMC and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing residential mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. Potential future changes in these rules and regulations could, among other things, adversely impact its customers' business activities by, among other things, establishing eligibility criteria for mortgage loan warehousing, prohibiting discrimination, providing for inspections and appraisals of properties, requiring credit reports on prospective borrowers, regulating payment features, requiring disclosures to customers, governing secured transactions, establishing collection, repossession and claims handling procedures and other trade practices and, in some cases, fixing maximum interest rates, insurance coverages, fees and loan amounts. Failure to comply with these requirements could lead to loss of approved status, class action lawsuits and administrative enforcement actions. Although the Company is not presently aware of any pending or proposed laws, rules or regulations which, if adopted, would make compliance more difficult or expensive, restrict the Company's ability to fund the warehousing of mortgage loans, restrict the Company's customers' ability to originate or sell mortgage loans, further limit or restrict the amount of interest and other charges earned from loans warehoused by the Company or otherwise adversely affect the business or prospects of the Company, no assurance can be given that limitations and/or restrictions of that nature will not be adopted in the future. See "Business -- Regulation -- Mortgage Warehouse Lending." REGULATION - NON-PRIME AUTO FINANCING. 16 Trans Lending's business will be subject to numerous federal and state consumer laws and regulations, which, among other things, require it to: obtain and maintain certain licenses and qualifications; limit the interest rates, fees and other charges Trans Lending is allowed to charge; limit or prescribe certain other terms of its contracts; provide specified disclosure; and define Trans Lending's rights to repossess and sell collateral. An adverse change in existing laws or regulations, or in the interpretation or enforcement thereof, or the promulgation of any additional laws or regulations would have an adverse effect on Trans Lending's business. See "Business -- Non-Prime Automobile Financing." RISK OF CHANGING ECONOMIC CONDITIONS; GEOGRAPHIC CONCENTRATION OF BUSINESS. The Company's results of operations will depend heavily upon the ability of its mortgage banking customers to originate mortgage loans. This ability is largely dependent upon general economic conditions in the geographic areas that the Company serves. Because these general economic conditions fluctuate, there can be no assurance that prevailing economic conditions will, at any point in time, favor the Company's business and operations. These changes could materially and adversely affect the Company's revenues and net income. See "Business." THE OPERATIONAL PROCESSING RISK. The basis for the Company's mortgage warehouse financing business is the acceptance of long-term loans, typically 15 to 30 year mortgages, from the Company's customers as collateral for very short-term financing, typically 15 days, until the mortgage loans are sold to an Agency. Although the Company's customers must have a commitment for each loan from an approved Agency before the Company will extend mortgage warehouse financing, there is no guarantee that the Agency will, in fact, accept the mortgage loan when delivered to it. Among the reasons for which a mortgage loan would not be accepted upon delivery are the following: incomplete documentation, inaccurate documentation or an over-allotment to the Agency's commitment by the mortgage originator. If for any reason an Agency does not accept the mortgage loan, the Company could find itself the owner of a long-term loan of less than market value instead of short-term bridge financing collateral. While the Company has a repurchase agreement with each of its customers which requires the customer to buy back the mortgage loan upon demand, there is no assurance that the customer will honor the repurchase agreement. Furthermore, the Company can give no assurance that, absent this repurchase by its customer, it will be able to sell the mortgage loan to another secondary market investor without incurring a loss in its investment in the loan. Failure of the Company to dispose of such a mortgage loan not accepted by an Agency could materially adversely affect the Company's financial position, its liquidity, and its relationships with its sources of financing, principally 17 banks to whom it may provide certain loan covenants that could be violated by one or several of these events. Furthermore, frequent short-term processing deadlines, a high volume of loan transactions, the complex document structure of each mortgage loan financing transaction, and very substantial penalties for delay in delivering loan documents to the secondary market, which may range from a surcharge of 1% - 2% of the principal amount of a loan in the case of a delay regarding an individual loan commitment, to a complete rejection and refusal to purchase an entire pool of loans, in the case of a delay in filling a pool commitment, are an integral part of the mortgage loan warehouse financing business. Although a delay in purchasing a pool of loans could hinder the Company's ability to timely fund additional loans submitted by other customers, and thereby adversely affect its ongoing relations with such other customers as a reliable source of mortgage warehouse financing, any charges or penalties resulting from such delays are the responsibility of the Company's customers. See "Business - The Collateral Tracking System;" and "Business - The Mortgage Loan Process From Application to a Pioneer Customer Through Funding." DIVIDEND POLICY AND RESTRICTIONS ON PAYMENT OF DIVIDENDS. The Company has never paid cash dividends on its Common Stock. Furthermore, the provisions of the plan of reorganization pertaining to Pioneer's emergence from bankruptcy prohibit Pioneer from paying any dividends to its common shareholders until the sum of $1,350,000 shall have been paid to Pioneer's pre-bankruptcy unsecured creditors. Further in accordance with said plan, Pioneer became obligated to pay certain portions of its net income in satisfaction of said payment obligation to its pre-bankruptcy creditors. Upon consummation of the Merger, the Company became obligated, by operation of law, to comply with such payment obligation and dividend payment prohibition. The Board of Directors does not anticipate paying cash dividends on its Common Stock in the foreseeable future as it intends to retain future earnings to finance the growth of the business. The payment of future cash dividends on the Common Stock will depend on such factors as earnings levels, anticipated capital requirements, the operating and financial condition of the Company and other factors deemed relevant by the Board of Directors. See "Dividend Policy;" "The Merger" and "Business - Pioneer's Chapter 11 Bankruptcy Proceedings." BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use all of the net proceeds of the Offering for mortgage warehouse lending activities, provided, however, that it has reserved the right to reallocate portions of such net proceeds for other uses -- up to $2,000,000 may be used for direct financing of Contracts, up to $500,000 may be used for working capital and up to $1,000,000 of such net proceeds may be used to enter into other specialty financial service sectors through acquisitions or joint ventures with 18 entities and executives having extensive experience in the targeted specialty. See "Use of Proceeds." CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE CLASS A WARRANTS. The Company will be able to issue shares of its Common Stock upon exercise of the Class A Warrants only if there is then in effect a current prospectus relating to such Common Stock, and only if such Common Stock is qualified for sale or exempt from such qualification under applicable state securities laws of the jurisdictions in which the various holders of the Class A Warrants reside. Although the Company has undertaken to, and intends to, file and keep current a prospectus which will permit the purchase and sale of the Common Stock underlying the Class A Warrants, there can be no assurance that the Company will be able to do so. Class A Warrants may not be exercised after [ ], 1997 (nine months after the date of this Prospectus) unless and until a Post-Effective Amendment has been filed with the Securities and Exchange Commission ("SEC" or Commission") and becomes effective. Although the Company intends to seek to qualify for sale the shares of Common Stock underlying the Class A Warrants in those states in which the Units are to be offered, no assurance can be given that such qualification will occur. The Class A Warrants may be deprived of any value and the market for the Class A Warrants may be limited if a current prospectus covering the Common Stock issuable upon exercise of the Class A Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the Class A Warrants then reside. See "Description of Securities - Class A Warrants." MARKET FOR UNITS, COMMON STOCK AND CLASS A WARRANTS; POSSIBLE VOLATILITY OF PRICES. Although the Common Stock and the warrants issued by the Company in connection with its IPO have been quoted on the Nasdaq SmallCap Market since August 1996, both securities have often been and may continue to be thinly traded. The Company has applied for quotation of the Units and Class A Warrants on the Nasdaq SmallCap Market, and for listing of the Units, Common Stock and Class A Warrants on the Boston Stock Exchange and the Pacific Stock Exchange. Such quotation and/or listings will not provide any assurance that an active public market for the Units, Common Stock or Class A Warrants will develop or be sustained. If an active public market does not develop or is not sustained, the market price and liquidity of the Units, Common Stock and/or Class A Warrants may be adversely affected. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations as well as general economic and market conditions may adversely affect the market price of the Units, Common Stock and/or Class A Warrants prevailing from time to time. 19 CLASS A WARRANTS REDEEMABLE. The Class A Warrants may be redeemed by the Company, whether or not a current prospectus is available, at any time during the four year period commencing one year after the date of this Prospectus at a price of $.10 per Class A Warrant, provided that the closing price of the Common Stock as quoted on the principal market on which such shares shall then be trading shall be not less than the Market Price per share during any period of 30 consecutive trading days ending on the third day preceding the date of such notice. Although a Class A Warrant holder has the right to exercise his Class A Warrants through the date of redemption, he may not be able to exercise because of lack of funds at the time of redemption or if there is not then in effect a current prospectus relating to the Common Stock underlying such Class A Warrants. Furthermore, in the event that the Company timely and properly issues a notice of redemption of the Class A Warrants, no trading in such securities shall be permitted after the close of business on the date of redemption. At such time the value of all Class A Warrants which shall not have been timely exercised prior thereto shall be reduced to the redemption price. See "Underwriting." AUTHORIZATION OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the issuance of preferred stock with designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. The issuance of preferred stock with anti-takeover measures could have a depressive effect on the market price of the Common Stock (should a market develop for the Common Stock) and could discourage hostile bids in which shareholders may receive premiums for their shares. See "Description of Securities -- Preferred Stock." IMPACT ON THE MARKET OF EXERCISE OF REPRESENTATIVE'S WARRANTS. The holders of the Representative's Warrants may exercise them at a time when the Company would, in all likelihood, be able to obtain equity capital by the sale of securities on terms more favorable than those provided by the Representative's Warrants. If the Representative's Warrants are exercised, the dilution of the voting and equity interests of the Company's shareholders which shall result therefrom could cause a decrease in the market price of the Company's securities, and may also adversely affect the Representative's ability to make and maintain an orderly market in the Company's securities. See "Description of Securities - Representative's Warrants." 20 THE REPRESENTATIVE'S INFLUENCE ON THE MARKET FOR THE COMPANY'S SECURITIES. A significant amount of the securities offered hereby may be sold to customers of the Representative. Such customers subsequently may engage in transactions for the sale or purchase of such securities with the Representative. Although it has no obligation to do so, the Representative intends to make a market in the Units, Common Stock and Class A Warrants and may otherwise effect transactions in such securities. If it participates in the market, the Representative may exert significant influence on the market, if one develops, for the securities described in this Prospectus. Such market making activity may be discontinued at any time. The price and liquidity of the Units, Common Stock and Class A Warrants may be significantly affected by the degree, if any, of the Representative's participation in such market. Additionally, the Representative may participate in the solicitation of the exercise of the Class A Warrants, in which event, it may be prohibited from engaging in any market making activities with respect to the Units, Common Stock and Class A Warrants during certain periods while the Class A Warrants are exercisable. Such restrictions may adversely affect the price and liquidity of the Units, Common Stock and Class A Warrants. Furthermore, if the Representative should exercise its registration rights to effect the distribution of the Units, Common Stock and Class A Warrants underlying the Representative's Warrants, the Representative, prior to and during such distribution, will be unable to make a market in the Units, Common Stock and Class A Warrants. If the Representative ceases making a market, the market and market prices for the Units, Common Stock and Class A Warrants may be adversely affected, and the holders thereof may be unable to sell such securities. SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Common Stock in the public market after this Offering could adversely affect the market price of the Common Stock. Upon completion of this Offering, the Company will have outstanding [ ] shares of Common Stock ([ ] shares if the Underwriters' over-allotment option is exercised in full). Of these shares, [ ] shares will be freely tradeable without restriction under the Securities Act. The remaining [ ] shares of Common Stock held by existing shareholders are restricted securities within the meaning of Rule 144. In accordance with Rule 144, 802,272 of such shares are presently eligible for sale to the public notwithstanding the fact that they have not been registered under the Securities Act. Pursuant to certain restrictions upon sale imposed by a "lockup" agreement which the holders of said 802,272 shares executed and delivered to the underwriter of the IPO as a condition to the closing of that offering, all of those shares will be ineligible for sale in the public market until August 15, 1997, provided that, after May 15, 1997, each of the holders of such shares may sell up to 10% of such holder's shares pursuant to Rule 144. In addition to the foregoing lockup restrictions, the Representative has required, as a condition to the closing of the Offering, that each of the Company's directors, officers, key employees and holders of 2% or more of the 21 Common Stock must execute written lockup agreements providing that, for a period of 12 months from the date of this Prospectus, they shall not offer, register, sell, contract to sell, grant an option for the sale of, issue, assign, transfer or otherwise dispose of any of the Company's securities held by them without the Representative's prior written consent. See "Description of Securities - Registration Rights," "Shares Eligible for Future Sale," "Dividend Policy" and "Underwriting." IMPACT OF MERGER ON NET OPERATING LOSS CARRYFORWARDS. As of March 31, 1996, the Company had accumulated net operating loss carryforwards in the approximate amount of $2.0 million. The Merger has limited the Company's use of such net operating loss carryforwards to an annual limitation not to exceed approximately $100,000 imposed by Section 382 of the Internal Revenue Code of 1986, as amended. Management believes that the losses that the Company has incurred since the Merger (aggregating $896,000) are not subject to these limitations. The Company's ability to use such net operating loss carryforwards is dependent upon its ability to generate taxable income in the future. See Note 6 of Notes to Financial Statements of Pioneer and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Merger on Net Operating Loss Carryforwards." INDEMNIFICATION OF DIRECTORS AND OFFICERS; POSSIBLE INABILITY TO RENEW OFFICERS' AND DIRECTORS' LIABILITY INSURANCE. Arthur H. Goldberg and Elie Housman, the Chief Executive Officer and Chief Operating Officer, of the Company, respectively, have agreed to enter into employment agreements with the Company, and Glenda Klein, the Company's Chief Financial Officer, has entered into an employment agreement with the Company. Such proposed agreements will provide, and Ms. Klein's agreement does provide, for the indemnification of such individuals against losses that they may incur in legal proceedings resulting from their services to the Company in the capacities of officers and directors. In addition, the Company's Bylaws provide for the indemnification of directors and officers to the fullest extent permitted by law. The Company has entered into indemnification agreements with its other directors. Although the Company currently maintains officers' and directors' liability insurance providing limits of $1,000,000 per occurrence, there can be no assurance that the Company will be able to maintain such insurance on acceptable terms or at all. Failure to maintain such insurance could have a material adverse effect on the Company's ability to attract and retain directors and officers. Any amounts which the Company may be required to pay under such indemnification agreements which are not reimbursed by insurance, either because no insurance policy is then in effect or because the amount of such required payments exceeds the policy limit, could have a material adverse effect on the Company. See "Management - Employment Agreements," and "Management - - Indemnification of Directors and Officers." 22 NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS OF LOW-PRICED STOCKS. The Common Stock is listed on the Nasdaq SmallCap Market. The Company has applied to the Nasdaq SmallCap Market for listing of the Units and Class A Warrants. If the Company is unable to satisfy Nasdaq's listing criteria for the Units and/or Class A Warrants, or if such securities are listed on the Nasdaq SmallCap Market, and the Company thereafter fails to satisfy the maintenance criteria for continued listing of any or all of such securities, they will be subject to being delisted, and trading, if any, would thereafter be conducted in the OTC Bulletin Board. As a consequence of such delisting, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Units, Common Stock and/or the Class A Warrants. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks. The SEC regulations generally define a penny stock to be any equity security that has a market price or exercise price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on Nasdaq and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three (3) years, (ii) net tangible assets of at least $5,000,000 if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000 during such issuer's last three years of operations. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Furthermore, in connection with any transaction in a penny stock, brokers must also provide investors with current bid and offer quotations therefor, the compensation of the broker and its salesperson in connection therewith and monthly account statements showing the market value of each penny stock in the investor's account. See "Description of Securities - Nasdaq SmallCap Market Listing; Boston Stock Exchange and Pacific Stock Exchange Listing Applications." In addition, if the Units, Common Stock or Class A Warrants are not quoted on Nasdaq, or the Company does not have $2,000,000 in net tangible assets, trading in the Units, Common Stock and Class A Warrants would be covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") for non-Nasdaq and non-exchange listed securities. Under such rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities also are exempt from this rule if the market price is at least $5.00 per share. As of the date of this Prospectus, the Company believes that the Units, Common Stock and Class A Warrants will be outside the definitional scope of a penny stock. In the event the Company's securities were subsequently to become 23 characterized as penny stocks, the market liquidity for such securities could be adversely affected. In such an event, the regulations on penny stocks could limit the ability of broker/dealers to sell the Units, Common Stock and/or the Class A Warrants and thus the ability of purchasers of the Units, Common Stock and Class A Warrants to sell such securities in the secondary market would be adversely affected. DIRECTORS' INVOLVEMENT IN BANKRUPTCY PROCEEDINGS. Between 1973 and 1989, Arthur H. Goldberg served as President and Chief Operating Officer of Integrated Resources, Inc. ("Integrated"), a diversified financial services company which commenced proceedings under Chapter 11 of the U.S. Bankruptcy Code in 1989. During the period in 1989 immediately prior to the commencement of such bankruptcy proceedings, Mr. Goldberg served as Integrated's President and Chief Executive Officer. In November 1994, Integrated's sixth amended reorganization plan was consummated. In accordance therewith, senior creditors of the reorganized company (known as Presidio Capital Corp.) may receive as much as 70% of their original claims totalling approximately $1.1 billion, and junior creditors will receive between 3.1% and 4.5% of their claims of approximately $672 million. In 1993, Glenda Klein, a director and Senior vice President of the Company, and her husband, filed a petition pursuant to Chapter 7 of the Bankruptcy Code. After receiving a discharge in bankruptcy, Mr. and Mrs. Klein reopened the bankruptcy proceedings and converted same to a case under Chapter 11 of the Bankruptcy Code. In April 1995, Mr. and Mrs. Klein deposited $100,000 into the Bankruptcy Court for the purpose of paying in full, with interest, any of the creditors of their bankrupt estate who had filed claims against in said proceedings. In October 1995, such proceedings were closed. LACK OF UNDERWRITING HISTORY The Representative was organized in February 1992 and first registered as a broker-dealer in 1994. Prior to this Offering, the Representative has participated as a sole or co-manager in four public offerings. Prospective purchasers of the Units offered hereby should consider the lack of experience of the Representative in being a manager of an underwritten public offering. See "Underwriting." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain Statements in the Prospectus Summary and under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operation," "Business" and elsewhere in this Prospectus constitute "forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may 24 cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statement. Such factors include, among others, the following general economic and business conditions: fluctuations in the nationwide and regional demand for housing and for automobiles; the capacity of the mortgage banking industry and the non-prime automobile financing industry and the Company's customers in those respective industries to satisfy consumer demand for respectively, mortgage loans and automobiles; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and other factors discussed in this Prospectus. See "Risk Factors." USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,750,000 Units offered by the Company hereby at the public offering price of $ per Unit, are estimated to be $ ($ if the over-allotment option granted to the Underwriters is exercised in full) after deducting the underwriting discounts and commissions, the Underwriters' ull) non-accountable expense allowance and the other estimated expenses of this Offering. The ull) Company expects to use the net proceeds, as follows:
Amount Percent ------ ------- mortgage warehouse lending operations (1) (4) $ % direct financing of automobile loans and leases (2) 2,000,000 % working capital (3) 500,000 % --------- ----- $ 100.0% ========= =====
- ---------- (1)The Company may allocate a portion of the proceeds of the Offering for use in connection with its strategic goal of expanding into other specialty finance niche activities through acquisitions or joint ventures. To the extent that such expansion activities will require the Company to expend cash, the source thereof will be the funds employed in the Company's mortgage warehouse lending operations. Accordingly, the funds employed by the Company in such mortgage warehouse lending activities will be concomitantly reduced. See "Business -- Strategy." (2)The Company may lend up to $2,000,000 to Trans Lending to engage in the direct financing of automobile loans and leases. Until such time as the Company's management decides whether to enter into one or more loan transactions with 25 Trans Lending for such purpose, the $2,000,000 shall be used by the Company in its mortgage warehouse lending operations. (3)The Company may use up to $500,000 to pay rent and/or other operating expenses. Until such time any portion of such proceeds is so used, said $500,000, or the unapplied balance thereof, shall be employed by the Company in its mortgage warehouse lending operations. (4)The allocation of the net proceeds of this Offering set forth above represents the Company's best estimate of its intended uses thereof based upon Management's present understanding of the Company's financial condition and business prospects. If the Company deems it necessary or advisable to enter into other specialty financial service sectors, primarily through acquisitions of businesses, or joint ventures with businesses or executives having extensive experience in the targeted specialty, it may reallocate up to $1,000,000 of the proceeds currently earmarked for use in its mortgage warehouse lending activities for such uses. If the Representative exercises the over-allotment option in full, the Company will realize additional net proceeds of approximately $, which will be added to the Company's working capital and used for general corporate purposes. The proceeds, if any, from the exercise of the Class A Warrants and any outstanding warrants and options will be added to working capital and used for general corporate purposes. 26 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996. The Proforma - Offering information includes and accounts for the effect of the anticipated results of the completion of the sale of 3,750,000 Units offered hereby (not including 562,500 Units subject to the Underwriters' over-allotment option) at an offering price of $ per Unit (after deduction of the estimated underwriting discounts and commissions and expenses of the Offering).
(in 000's) Offering Proforma Sept. 30, 1996 Adjustments Offering -------------- ----------- --------- Debt Obligations: Loans payable, Mortgage Warehouse $1,582 $ --- $1,582 Total Debt Obligations (1) 1,582 --- 1,582 ===== ==== ===== Common Stock (1) - $.01 par value, authorized 20,000,000, issued and outstanding: 1,442,272 shares at Sept. 30, 1996: 5,xxx,xxx shares - Proforma Offering 15 38 53 Preferred Stock - $.01 par value, authorized 5,000,000 shares, issued and outstanding at Sept. 30, 1996: 0 Additional paid-in capital (2) 10,563 Accumulated Deficit (8,321) --- (8,321) ----- ----- ----- Total Shareholders Equity 2,257 ----- ----- ----- Total Capitalization $3,839 $ $ ===== ==== =====
- ---------- (1) Does not include additional non-debt related liabilities of approximately $232,000. (2) Net equity impact of issuance of 3,750,000 Units at $ per Unit. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. Furthermore, the provisions of the plan of reorganization pertaining to Pioneer's emergence from bankruptcy, prohibit it from paying any dividends to its common 27 shareholders until the sum of $1,350,000 shall have been paid to its pre-bankruptcy unsecured creditors, provided, however, that such prohibitions shall not be applicable in the event that 50% of the proceeds in excess of $5,000,000 derived from any public offering of securities made by it shall be utilized for payment of said $1,350,000. The proceeds which the Company derived from the IPO did not exceed said $5,000,000 threshold. The proceeds which the Company shall derive from this Offering will exceed such threshold. The Board of Directors does not anticipate that it will use any portion thereof to pay any part of said $1,350,000 obligation. Accordingly, the Board of Directors does not anticipate paying cash dividends on the Common Stock in the foreseeable future. Upon satisfaction of the foregoing payment obligation, the payment of future cash dividends on the Common Stock will depend on such factors as earnings levels, anticipated capital requirements, the operating and financial condition of the Company and other factors deemed relevant by the Board of Directors. See "Business - Pioneer's Chapter 11 Bankruptcy Proceedings" and "Description of Securities." MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq SmallCap Market on August 14, 1996. The ranges of the high, low and closing prices of the Common Stock on a quarter-by-quarter since said date through December 20, 1996 were, as follows:
Quarter-End High Low Close ----------- ---- --- ----- Sept. 30, 1996 $4.875 $2.375 $2.75 Dec. 20, 1996 $2.75 $1.38 $1.63
As of December 20, 1996, there were approximately 500 beneficial holders of the Company's Common Stock. The Company has not paid any dividends on its Common Stock, and has no plans to do so in the foreseeable future. See "Dividend Policy." 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As of June 14, 1993, when the Company commenced active operations following its emergence from Chapter 11 bankruptcy proceedings, it had an available credit line of $1 million from one source, UMB. The Company's lines of available credit were subsequently increased to an aggregate of $2.35 million as of March 31, 1995 and $4.2 million as of June 1996. Substantially all of the business conducted by the Company during the years ended March 31, 1994 and 1995 was with one active mortgage banking company who had a credit line approved by the Company in the amount of $2 million. In April 1995, the Company discontinued that customer's credit line when it failed to comply with the Company's underwriting requirement to provide audited financial statements for the year ended December 31,1994. As a result of the death of the Company's former Chairman and Chief Executive Officer, the Company did not engage in any substantial mortgage warehouse lending activities from April 1995 through August 1995. During the period from August 1995 through November 1995, the Company developed customer relationships with three new mortgage banking companies, and from August 1995 through March 1996, the Company generated approximately $20.4 million in mortgage warehouse lending volume from those new customers. Between April 1, 1996 and September 30, 1996 these three customers generated approximately $26.8 million in warehouse loan volume, a 31% increase over the fiscal year ended March 31, 1996. During September 1996, the Company added a fourth customer which received a $5 million line of credit. The Company is in the process of evaluating the creditworthiness of several other potential customers. Although the Company will seek to conduct business in the future with a greater number of mortgage banking customers, and thereby reduce the risks attendant in relying upon a small number of sources to support its business, no assurance can be given that it will receive such applications, or that such applicants will thereafter engage in a large enough volume of mortgage warehouse lending transactions to sustain the Company's operations. The cessation of business of any of the Company's active customers or the inability of its customers to provide the Company with an increased level of loan volume could materially adversely affect the Company's ability to generate sufficient revenues to operate profitably and to continue to meet its cash obligations in future periods. During the fiscal years ended March 31, 1995 and 1996, the Company incurred net losses of $589,000 and $480,000, respectively. Such losses were partly attributable to noncash expenses (primarily depreciation, amortization, debt discount expenses and deferred consulting agreement expenses) totalling $329,000 29 and $164,000 during 1995 and 1996, respectively, and the inability of the Company to generate a sufficient volume of loan transactions with its customers. During the six month periods ended September 30, 1995 and 1996, the Company incurred net losses of $229,043 and $246,369 respectively. Such losses were partly attributed to noncash expenses (primarily depreciation, amortization and debt discount expenses) totaling $98,267 and $110,936 during the 1995 and 1996 periods, respectively, and the inability of the Company to generate a sufficient volume of loan transactions with its customers. RESULTS OF OPERATIONS YEAR ENDED MARCH 31, 1995 COMPARED WITH YEAR ENDED MARCH 31, 1996 REVENUES. Due primarily to the death of Uri Lieber, the lessening, and ultimate cessation of mortgage lending operations, and the restructuring of the Company's management and operations which took place during the first half of the fiscal year ended March 31, 1996, the Company generated only $97,190 in revenues, a 43.5% decrease from its fiscal year 1995 revenues. Such revenues were generated by funding 201 loans totalling $20,501,107 with three customers. The interest income component of such revenues amounted to $76,957, a 22.6% decrease over the interest income generated during the fiscal year ended March 31, 1995. Such decrease was due to the Company's operational inactivity during the first half of the fiscal year. The processing fee component of such revenues amounted to $15,733, which represented a 76% decrease from the results of the prior fiscal year. Such decrease was due to the smaller volume and aggregate dollar value of loans financed. DIRECT COSTS. The Company's direct costs consist of the interest and other charges which it must pay to its revolving credit line providers and to the IPO Bridge Financing Lenders. During the fiscal year ended March 31, 1995, the Company's interest expense and other bank charges paid to providers of its revolving lines of credit amounted to $68,552. During this period, the Company financed a total of 222 loans aggregating $26,222,221 in weighted average principal amounts of approximately $118,118 for an average duration of 12 days per borrowing, which amounts include 101 loans funded through bank borrowings aggregating $11,454,426 in weighted average principal amounts of $113,410 for an average duration of 11 days. During the fiscal year ended March 31, 1996, the Company's interest expense and other bank charges paid to providers of the Company's revolving lines of credit amounted to $95,408. During this period, the Company financed a total of 201 loans aggregating $20,501,107 in weighted average principal amounts of approximately $101,996 for an average duration of 15 days per borrowing, which amounts include 152 loans funded through bank borrowings aggregating $16,507,308 in weighted average principal amounts of $108,601 for an average duration of 15 days. Such decrease in loan activity was due to the Company's above-mentioned operational inactivity during the first half of the fiscal 30 year ended March 31, 1996. The 28% increase in interest expense which occurred notwithstanding the decrease in lending activity was due primarily to an increase in use of the Company's bank credit facility, an increase in the length of time when such loans were outstanding from an average of 12 days to an average of 15 days and a higher weighted average prime rate during the fiscal year ended March 31, 1996 over the average weighted prime rate of fiscal 1995. Interest expense on the IPO Bridge Financing in fiscal 1995 and 1996 amounted to $142,748 and $79,231, respectively, consisting of interest payable of $24,000 and $21,163, respectively, debt discount amortization of $102,748 and $55,244, respectively, and deferred issuance cost amortization of $16,000 and $2,824, respectively. In February, 1996, the Company paid the sum of $122,492 in full satisfaction of its indebtedness to two of the IPO Bridge Financing Lenders. The Company's IPO Bridge Financing obligations were be paid in full upon closing of its IPO. OPERATING EXPENSES. The Company's operating expenses of $544,462 during the fiscal year ended March 31, 1995 consisted primarily of salaries and benefits paid or accrued to Uri Lieber and Glenda Klein ($159,427), depreciation and amortization ($110,498), the primary component of which is the Collateral Tracking System software ($91,327), accounting and legal fees ($71,010), amortization of a consulting agreement ($96,000), telephone ($22,352), office rent ($23,803) and miscellaneous expenses ($61,372 in the aggregate). The Company's operating expenses of $433,709 during the fiscal year ended March 31, 1996 consisted primarily of salary and benefits paid to Glenda Klein and other staff ($134,555), depreciation and amortization ($101,300), the primary component of which is the Collateral Tracking System software ($92,312), accounting and legal fees (114,382), telephone ($19,782), office rent ($11,609) and miscellaneous expenses ($52,081 in the aggregate). It is anticipated that aggregate operating expenses will increase less than proportionately as staffing and office space is increased to manage the greater number of mortgage warehouse loan transactions that management believes the Company will be implementing with the proceeds of the IPO and this Offering. See "Business - Employees" and "Business - Facilities." NET LOSS. During the fiscal years ended March 31,1995 and 1996, the Company incurred a net loss of $589,155 and $479,803, respectively. The limited nature of the lending capital which was available to the Company, coupled with the non-cash expenses which it incurred during each of such years (primarily depreciation, amortization, debt discount and deferred consulting agreement expenses) totalling $328,965 and $164,080, respectively, were substantial contributing factors to such losses. The inability to attract customers and the higher loan volume which they would generate which were caused by the Company's lack of sufficient warehouse loan credit availability also negatively impacted net income for the above-mentioned periods. In addition, the Company has not historically incurred salary expense at a level which equals the current combined compensation 31 arrangements with its Vice President and Chief Financial Officer, and with its Chief Executive and Chief Operating Officers. Had such arrangements been in place during the years ended March 31, 1995 and 1996, the Company would have incurred additional salary expense of approximately $44,000 and $110,000 in 1995 and 1996, respectively, which would have increased the Company's net loss to approximately $633,000 and $590,000, respectively, for such periods. See "Management - Employment Agreements." CASH FLOWS FROM OPERATIONS. The Company generated negative cash flows from operations of approximately $194,000 and $253,000 for the fiscal years ended March 31, 1995 and 1996, respectively. Such negative cash flows are primarily a result of the Company's inability to generate a sufficient level of loan volume from its customers which is further negatively impacted by the limited funds available to the Company for use in its mortgage warehouse activities (approximately $4.2 million in lines of credit and $150,000 in net liquid assets). In order to generate positive cash flows from operations, the Company will need to increase its loan funding capacity and correspondingly increase its loan revenues and loan volumes. The Company believes that the addition of the $1,970,466 portion of the proceeds of the IPO which it is employing in its mortgage warehousing operations will enable it to increase its base of customers and concomitantly increase its loan volume to a level sufficient to generate positive operating cash flows and net income. The infusion of such proceeds increased the Company's net worth to approximately $2,600,000, increased its cash balance to approximately $2,300,000, and provided it, without effecting any changes in its business operations, with sufficient cash to support such operations during the 12 month period following the closing of the IPO. REALIZABILITY OF LONG-LIVED ASSETS. Management has evaluated the realizability of its long-lived assets (primarily furniture and equipment and proprietary computer software) having a net book value of $217,990 at March 31, 1996 in accordance with the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SIX MONTH PERIOD ENDED SEPTEMBER 30, 1995 COMPARED WITH THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1996 REVENUES. During the six month period ended September 30, 1996, revenues increased to $129,723 compared to $11,392 for the six month period ended September 30, 1995. Such revenue was generated from the three customers added during the period August, 1995 through November, 1995 and the fourth customer added September 20, 1996. 331 loans totaling $26,796,000 were funded during the six month period ended September 30, 1996, which represented 65% and 31% increases, 32 respectively, in the total number of loans and the dollar volume of loans funded during the entire fiscal year ended March 31, 1996. The interest and processing fee component of such revenues reported for the six months ended September 30, 1996 amounted to $103,280 and $26,443, respectively, compared to $6,452 in interest and $4,940 in processing fees for the six months ended September 30, 1995. DIRECT COSTS. The Company's direct costs consist of the interest and other charges which it must pay to its revolving credit line providers and the interest which it paid to the IPO Bridge Financing Lenders. During the six month periods ended September 30, 1995 and 1996, the Company's interest expense and other bank charges paid to revolving line of credit providers amounted to $9,051 and $120,887, respectively. Due primarily to the death of the Company's former Chairman and Chief Executive in March 1995, the lessening, and ultimate cessation of mortgage lending operations which took place by reason thereof, and the restructuring of the Company's management and operations which took place during the first half of the fiscal year ended March 31, 1996, the Company financed a total of 17 loans totaling $1,233,236 in the weighted average principal amount of $72,543 for an average duration of 14 days per borrowing during the six month period ended September 30, 1995. During the six month period ended September 30, 1996, the Company financed a total of 331 loans totaling $26,796,000 in the weighted average principal amount of $80,955 for an average duration of 14 days per borrowing, which amounts include 277 loans funded through bank borrowings aggregating $22,349,000 in the weighted average principal amount of $80,682. Such increase in loan activity was due to the Company's above mentioned addition of four customers. The increase in interest expense and bank fees was due to the increase in loan funding operations and the use of the Company's bank credit facility. Interest expense on the IPO Bridge Financing for the six month periods ended September 30, 1995 and September 30, 1996 amounted to $14,824 and $4,885, respectively, and debt discount amortization thereon during the same periods amounted to $42,744 and $37,500, respectively. In February, 1996, the Company paid the sum of $122,492 in full satisfaction of its indebtedness to two of the IPO Bridge Financing Lenders. Upon the closing of the IPO, the remaining IPO Bridge Financing obligation of $128,356 (which included $28,356 in accrued interest) was retired in full. OPERATING EXPENSES. The Company's operating expenses of $193,870 during the six month period ended September 30, 1995 consisted primarily of depreciation and amortization of $50,650, the primary component of which is the Collateral Tracking System ($46,156); salaries and benefits to the Company's former Chairman and Chief Executive Officer and to its Senior Vice President ($66,859); legal and accounting fees ($25,203); telephone ($8,853), office rent ($5,805), temporary staff ($15,776) and miscellaneous expenses ($20,724 in the aggregate). The Company's operating expenses of $218,379 during the six month period ended September 30, 1996 consisted primarily of depreciation and amortization of ($50,650), 33 the primary component of which is the Collateral Tracking System ($46,156), salary and benefits to the Company's Chief Executive, its President, its Senior Vice President and office staff ($52,821); accounting and legal fees ($26,196); telephone ($11,144); office rent ($5,805); temporary staff ($23,849) and miscellaneous of ($47,914). The increase in such expenses during the six month period ended September 30, 1996 as compared to the comparable period during 1995, was due to the increase in lending activity and the increased costs associated with the professional, financial consulting and similar services which the Company has incurred by reason of its change in status from a privately owned to a publicly held company. NET LOSS. During the six month periods ended September 30, 1995 and 1996 the Company incurred net losses of $229,043 and $246,369, respectively. Such losses were primarily due to the Company's inability during the former period to attract additional warehouse lines of credit which it needs in order to operate profitably, and the Company's inability to improve such lines of credit during the latter period while it was seeking to obtain additional credit lines from approximately 20 banks and other financial institutions following the completion of the IPO. Such non-cash expenses as depreciation, amortization and debt discount totaling $98,267 and $110,936, respectively, were also contributing factors to such losses. CASH FLOWS FROM OPERATIONS. The Company generated negative cash flows from operations of $157,542 for the six month period ended September 30, 1995 which resulted primarily from a loss from operations of $229,043. The negative cash flow from operations of $494,292 for the six month period ended September 30, 1996 resulted primarily from a decrease in accounts payable and accrued expenses ($150,277), an increase in other assets of ($191,900) and the loss from operations of ($246,369). In order to operate profitably, the Company needs to increase its warehouse loan lines of credit beyond its current level of $4,000,000. Accordingly, immediately after the closing of its IPO, the Company began to focus its efforts on acquiring such additional credit lines. In that regard, the Company has sought warehouse lending lines of credit from approximately 20 different banks and financial institutions. Several of such lenders have declined to extend credit to the Company for a variety of reasons including, but not limited to, the relatively small size of the Company's asset and equity bases in relation to such lenders' lending parameters. As of the date of this Prospectus, the Company is maintaining dialogues with approximately eight financing sources who have expressed an interest in considering the Company's application for financing, and it intends to make applications to additional warehouse line of credit sources. Although the Company believes that the addition of the $1,970,466 portion of the proceeds of the IPO which it is employing in its mortgage warehousing operations will enable it to effect the needed expansion of its credit facilities by as much as $10 - 20 million, and thereby achieve profitability through the ability to increase its customer base and aggregate dollar loan volume 34 which such additional lending capacity will permit it to undertake, no assurances can be given in that regard. REALIZABILITY OF LONG-LIVED ASSETS. Management has evaluated the realization of its long-lived assets (primarily furniture and equipment and proprietary computer software) having a net book value of $175,089 at September 30,1996 in accordance with the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." Based on such evaluation and taking into consideration the positive cash flows and earnings the Company believes it will be able to generate in future periods, management does not believe that there is an impairment of its long-lived assets at September 30, 1996. LIQUIDITY AND CAPITAL RESOURCES On July 31, 1995, the Company paid UMB a $20,000 renewal fee in connection with its consummation of a thirteen month extension (due to expire August 31, 1996) of its $2,000,000 warehousing line of credit. On November 9, 1995 and February 23, 1996, respectively, the Company paid an additional $4,167 and $7,917 in consideration for the extension of said line of credit to $2,500,000 and then to $4,000,000. In connection therewith, the Company also granted to UMB a five year option to purchase up to 41,271 shares of Common Stock at an exercise price of $5.50 per share. Said option shall expire with respect to any unexercised portion thereof in the event that the Company's credit line with UMB shall not be renewed or extended. See "Description of Securities - UMB Option." On September 10, 1996, the Company paid UMB a $40,000 renewal fee in connection with the extension of its credit facility through August 31, 1997. The Company's primary sources of the capital which it employs in its warehouse lending operations are borrowings under its UMB line of credit and its net equity capital funds of approximately $2,072,000. PIONEER'S CHAPTER 11 BANKRUPTCY PROCEEDINGS. In April 1993, Pioneer emerged from bankruptcy pursuant to a plan of reorganization, as subsequently modified (the "Plan"), which provided, among other things, that each unsecured creditor would receive a distribution equal to such creditor's pro rata share of $150,000, plus a non-interest bearing unsecured note (the "Note"). Pursuant to the terms of the Notes, if at the close of the fiscal year ended March 31, 1995, the Company had any net income (net income, as reported in the Company's audited financial statements, increased by any deductions taken for depreciation or amortization, and decreased by certain interest earnings) in excess of $400,000, each holder of a Note would have been entitled to receive distributions equal to such creditor's pro rata share of 20% of the net income in excess of said $400,000. However, the Company had no net income during said fiscal year. Beginning with the close of the fiscal year ending March 31, 1996, and for all fiscal years thereafter, each holder of a Note shall be entitled to receive a distribution equal to such 35 creditor's pro rata share of 20% of the net income available for note payments, if the net income for any such fiscal year exceeds $1,300,000. Holders of the Notes shall continue to receive payments under the Notes, consistent with the foregoing terms, until an aggregate of $1,350,000 is paid under the Notes. At such time, the Notes shall be deemed fully satisfied and discharged and the Company shall have no other or further obligations thereunder. The Company was not required to make any payments to the Note holders with respect to the fiscal year ended March 31, 1996. The Plan, as assumed by operation of law by the Company at the time of consummation of the Merger, further provides that, until such time as said $1,350,000 has been paid in full, no dividends may be declared or paid to the holders of any class of the Company's common stock, it may not redeem, purchase or otherwise acquire for value any of its capital stock and it may not return any of its assets or make any distribution of assets to any of its shareholders, provided, however, that such prohibitions shall not be applicable in the event that 50% of the proceeds in excess of $5,000,000 derived from any public offering of securities made by the Company shall be utilized for payment of said $1,350,000. The proceeds which the Company derived from the IPO did not exceed said $5,000,000 threshold. The proceeds which the Company shall derive from this Offering will exceed such threshold. The Board of Directors does not anticipate that it will use any portion thereof to pay any part of said $1,350,000 obligation. Therefore, it is not expected that the Company will be undertaking any of the aforementioned currently prohibited actions in the foreseeable future. Accordingly, until such time as the Notes have been paid in full, the Company will be obligated, to the extent hereinabove described, to pay to Pioneer's pre-Chapter 11 unsecured creditors an aggregate of $1,300,000 of the income that otherwise would be available for use in connection with the Company's operations, or for distribution to its shareholders. No holder of any of the Notes was affiliated with Pioneer, or is affiliated with the Company. IMPACT OF NEW ACCOUNTING STANDARDS In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 109, Accounting for Income Taxes ("FAS No. 109") which requires the use of an asset and liability approach. The asset and liability approach computes deferred taxes based on expected future tax consequences to be in effect when timing differences reverse, whereas the deferred method utilizes the tax rate in effect at the time of the origination of the timing differences. The Company adopted FAS No. 109 in its current fiscal year. Implementation of FAS No. 109 did not have a material effect on the Company's financial position and results of operations. In January 1995, the Company adopted FAS 114, "Accounting by a Creditor for Impairment of a Loan," FAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" and FAS 119, 36 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." Adoption of these new accounting and disclosure standards did not have a material effect on the Company's financial position or results of operations. IMPACT OF IPO ON NET OPERATING LOSS CARRYFORWARDS As of September 30, 1996, the Company had available net operating loss carryforwards of approximately $2.3 million. As a result of changes in the Company's common stock ownership, the Company is subject to annual limitations pertaining to the use of such operating loss carryforwards. The Company expects that the amount of net operating loss carryforwards which may be utilized in any future period will be limited to an amount not to exceed approximately $100,000 per year. Management believes that the losses that it has incurred since the Merger (aggregating $896,000) are not subject to these limitations. The Company's ability to use such net operating loss carryforwards is dependent upon its ability to generate taxable income in the future. See Note 6 of Notes to Pioneer's Financial Statements. THE MERGER In November 1994, PCF and Pioneer consummated the Merger pursuant to an Agreement and Plan of Merger (the "Merger Plan") which provided, among other things that (a) Pioneer would merge with and into PCF; (b) the Company, as the surviving constituent of the merger would change its name to Pioneer Commercial Funding Corp.; (c) upon consummation of the Merger, the persons who were serving as the directors and officers of Pioneer would serve in the same capacities as the directors and officers of the Company (see "Management"); and (d) the Merger would be effected by issuing one share of the Company's Common Stock in exchange and extinguishment of each share of Pioneer's common and preferred stock then held by its shareholders. Upon consummation of the Merger, the Company exchanged, on a share for share basis, 814,126 shares of its Common Stock for the 318,017 shares of Pioneer's Class A common stock, the 333,311 shares of Pioneer's Class B common stock and the 162,798 shares of Pioneer's Class A preferred stock which had been issued and outstanding immediately prior to the Merger. Further in accordance with the Merger Plan, all property, rights, privileges, powers, contracts, and franchises and every other interest possessed by Pioneer in any capacity became the property of the Company, all rights of creditors and all liens upon any property of Pioneer were preserved unimpaired and all debts, liabilities and duties of Pioneer attached to the Company and became enforceable against it to the same extent as if said debts, liabilities, and duties had been incurred or contracted by the Company. The foregoing discussion is a summary of the principal terms of the Merger Plan. It does not purport to be complete, and it is qualified in its entirety by 37 reference to the Merger Plan, a copy of which is on file as an exhibit to the Company's Registration Statement of which this Prospectus forms a part. See "Available Information." BUSINESS GENERAL OVERVIEW The Company is a specialized niche financial services company currently engaged in (i) residential mortgage warehouse lending and (ii) origination of consumer automobile loan and lease financings through a recently acquired 50% interest in Trans Lending. Trans Lending presently represents AVCO, ACC and Norwest who have agreed to purchase Contracts acquired by Trans Lending from approximately 60 dealers located in Florida. The Company will seek to enter other specialty financial service sectors primarily through acquisitions of businesses or joint ventures with businesses or executives having extensive experience in the targeted specialty. The Company is a mortgage warehouse lender providing short-term (generally 10 - 30 day) financing to small to medium sized mortgage bankers who hold ("warehouse") the mortgage loans they originate pending the nonrecourse sale of such loans to institutional investor agencies in the secondary mortgage market such as GNMA, FNMA, and FHLMC and/or accredited financial institutions such as banks, thrifts, insurance carriers and large mortgage bankers. STRATEGY The Company's multi-pronged growth strategy to maximize long-term shareholder values is: Expanding the scope of the Company's mortgage warehouse lending activities by increasing its available lines of credit and the number of mortgage bankers served. Developing and expanding Trans Lending's automobile financing activities through its representation of a greater number of banks and other institutional purchasers of auto loans, and through the establishment of Contract acquisition relationships with a greater number of franchised and independent used car dealerships. Expanding into other specialty finance niche activities primarily through acquisitions of businesses, or joint ventures with businesses or executives having extensive experience in the targeted specialty. 38 Obtaining commitments from Arthur H. Goldberg, the Company's Chief Executive Officer, and Elie Housman, the Company's President and Chief Operating Officer, to devote substantial portions of their time to the affairs of the Company. MORTGAGE WAREHOUSE LENDING INDUSTRY OVERVIEW General. Mortgage bankers (i) originate mortgage loans, as direct lenders; (ii) act as intermediaries in the subsequent marketing and sale of mortgage loans in the secondary mortgage market; (iii) warehouse mortgage loans; and (iv) service mortgage loans. Historically, mortgage banks have originated approximately 20% - 25% of all mortgage loans. However, according to the U.S. Department of Housing and Urban Development, due to changes during the late 1980's and early 1990's in the composition and liquidity of the savings and loan industry (the historic market leader in mortgage loan originations), and the regulatory tightening of commercial banking industry capital requirements, mortgage banks have increased their share of the mortgage loan origination market to approximately 50%. Mortgage warehouse lending transactions are collateralized principally by its receipt of (i) an instrument of assignment of the original mortgage loan note endorsed in blank by the primary lender; (ii) a certified copy of the mortgage or deed of trust and an instrument of assignment thereof executed in blank by the primary lender; and (iii) an executed commitment from an Agency to purchase the mortgage loan at a specific price and time. The Secondary Mortgage Market. After World War II, the United States Government created three for-profit entities to stimulate the availability of mortgage financing for residential dwellings, FNMA, FHLMC and GNMA. Prior to the creation of these Agencies, commercial and savings banks made mortgage loans only to the extent they could retain such loans in their own portfolios or sell them to private investors. These Agencies created the secondary mortgage market by issuing and guaranteeing mortgage-backed fixed income securities to the investing public. The Agencies obtain their funds by offering long-term bonds to institutional investors which are secured by the underlying mortgages purchased by the Agencies, and which pass through to the bondholders the mortgage principal and interest payments received by the holders of such mortgages. Additionally, inasmuch as GNMA is an organ of the United States government, its bonds are also backed by the full faith and credit of the U.S. Treasury. The Agencies rely on independent companies to service the loans they purchase. Often the servicing agent is the same mortgage bank from whom an Agency purchases a mortgage loan. Such services include collecting interest and principal payments on a monthly basis 39 and insuring that property taxes and property insurance premiums are paid as and when they become due. The Agencies purchase mortgages pursuant to commitments which they issue to mortgage banks and other mortgage loan originators who have been previously screened by the Agency and qualified as an Agency-approved mortgage lender. The most prevalent commitment provides for the purchase by an Agency of "standard pools" of mortgage loans in blocks ranging from $1 million to $5 million. That pool of mortgage loans, either separately or when aggregated with other similar pools purchased by an Agency, becomes the underlying collateral for the fixed income, so-called "mortgage-backed securities" that are issued and guaranteed by the Agency. During the five year period between 1991 and 1995, the dollar volume of residential mortgage loans purchased by the FHLMC, FNMA, GNMA, VA and FHA was, as follows:
FHLMC FNMA GNMA VA FHA Totals ----- ---- ---- -- --- ------ (Billions of Dollars) 1995 $ 93.386 $167.048 $ 72.866 N/A $ 43.800 $382.120 1994 124.246 192.011 111.215 N/A 94.900 522.342 1993 229.706 313.751 138.000 N/A 102.200 783.657 1992 191.126 75.905 81.900 $24.500 50.900 424.331 1991 99.965 37.202 62.600 15.300 47.800 262.867
- ------------------------------ Source: Reports of FHLMC and FNMA for the years 1991 - 1995. Mortgage bankers desiring to originate and sell mortgage loans to the Agencies are required to produce such loans in accordance with very specific Agency guidelines and criteria. As of the date of this Prospectus, the loan limits imposed for the mortgage loans on owner-occupied residential properties that the FHLMC, FNMA, GNMA, VA and FHA will purchase are, as follows:
FHLMC(1) FNMA(1) GNMA(2) VA(2) FHA(1) -------- ------- ------- ----- ------ Single Family $207,000 $207,000 $185,000 $185,000 $155,250 2 Units 264,750 264,750 198,550 3 Units 320,050 320,050 240,000 4 Units 397,800 397,800 298,350
- ------------------------- Source: Reports of FHLMC and FNMA for the years 1991 - 1995. 40 (1) The loan limits imposed by FHLMC, FNMA and FHA are generally applicable throughout the United States. (2) The loan limits set forth herein are those imposed by GNMA and the VA in regions of the United States such as Southern California and Metropolitan New York which they have designated as "High Cost Areas." THE COMPANY'S MORTGAGE LENDING OPERATIONS The Company provides financing for small to medium sized mortgage bankers possessing at least $350,000 of capital who have been approved as a seller or servicer of mortgage loans by one or more of the Agencies, and who have been granted a mortgage warehouse line of credit by the Company after satisfying its own financial, business and creditworthiness standards. The mortgage loans for which the Company provides such financing are primarily single family residences and other owner occupied residential properties including one to four unit properties in which the owner is the occupant of at least one of such units. In a mortgage warehouse loan transaction, the Company's mortgage banking customer will first purchase a funding commitment from an Agency for a fee which is usually a fraction of a percent of the commitment amount. Then, the Company's customer will seek to fill the commitment through the submission of one or more loans to the Agency which conform not only to the Agency's established loan criteria, but also to the commitment's rate and delivery date. These commitments can take three forms: individual loan, small pool, and standard pool. An individual loan commitment is an agreement by an Agency, with a usual term of no longer than two weeks, to purchase a single whole loan of a specified amount on or before a specified date at a specified rate. A small pool commitment is an agreement by an Agency, with a usual term of no longer than three weeks, to purchase an unrestricted number of whole loans of a specified total amount on or before a specified date at a specified rate. A standard pool commitment is an agreement by an Agency, with a usual term of no longer than four weeks, to purchase an unrestricted number of whole loans of a specified total amount of no less than $1 million on or before a specified date at a specified rate. In general, the Company's customers do not possess sufficient capital or bank lines of credit to fully fund loans they originate during the period of time that transpires between the date on which a loan is closed and the Agency Commitment Date. Accordingly, the Company provides its customer with a line of credit that is collateralized by each loan that it funds for its customer, which line of credit enables the customer to warehouse the loan for the period of approximately 10 to 30 days that typically occurs from the closing of the loan until the Agency Commitment Date. During this period, the Company holds the loan documents (generally, the promissory note and the first deed of trust or mortgage securing the note), and upon its delivery of the loan documents to the Agency, the Company is paid the aggregate amount of the loan. 41 The Company derives its revenues from the transaction-based fees that it charges its customers in connection with the loans it funds on their behalf, and the interest rate spread (generally 0.75%) between the yield paid by the Company to its financial sources for its borrowed funds, and the interest rate charged by it for mortgage loans that it funds on behalf of its mortgage banker customers. Transaction fees are determined pursuant to a schedule based upon the length of time between the funding of a loan by the Company and reimbursement of same by an Agency. In each case, the Company's customer is charged an initial fee of $70.00 to $90.00 upon funding of a loan. If the loan is repaid within 30 days of the funding date, no additional fee is usually earned by the Company on such loan. If such loan is not repaid within such period, its customer must pay an additional fee of $150.00. In the event that the Company disburses funds to a title company in preparation for closing of a loan which thereafter does not close, only the initial fee, plus interest for the one to three days that it normally takes before such funds are returned by the title company to the Company are charged by it to its customer. Generally, the Company's mortgage warehouse loan customers pay interest for the funds they borrow from it at a rate that ranges from one quarter of one percentage point to one percentage point over the UMB Prime Rate (as defined below). THE COMPANY'S UMB LINE OF CREDIT In accordance with the $4,000,000 revolving line of credit and security agreement between the Company and UMB, as amended (the "UMB Agreement"), the Company pays a fee of $30.00 per loan plus interest on advances made under its credit line at a rate which is one percent above the highest "prime rate" of interest, quoted from time to time by the Wall Street Journal as the "base rate on corporate loans at large U.S. money center commercial banks" (the "UMB Prime Rate"). As collateral security for its indebtedness to UMB under said agreement, the Company has granted to UMB a security interest in various assets including, but not limited to, all promissory notes acquired by the Company with respect to any loan funded by it with moneys advanced under its UMB credit line and all mortgages or other forms of collateral security obtained by the Company in connection with the funding of such loans. THE COMPANY'S MORTGAGE BANKING CUSTOMERS During the fiscal year ended March 31, 1995, the Company did business with three mortgage banking customers, Premium Mortgage Company ("Premium"), National Mortgage Banking Group, Inc. ("National") and The Mortgage Group, Inc. ("TMG"). Premium is located in, and originates mortgage 42 loans in, California. National is located in, and originates mortgage loans in Southern California. TMG is located in Virginia, and originates mortgage loans in Virginia, Washington, D.C. and California. 82.25% of the Company's warehouse lending business between the Inception Date and March 31, 1995 was conducted with Premium. The Company suspended its customer relationship with Premium in April 1995 due to Premium's failure to comply with the Company's underwriting criteria. Between April 1, 1994 and January 1, 1995, the date when National ceased doing business, the Company funded four loans totalling $471,259 for National. The average size of such loans was $117,815. The Company commenced business operations with TMG on August 10, 1994. In January 1995, TMG began processing its warehouse loan credit needs through another provider, and ceased doing business with the Company. During the six month period when TMG was an active customer, the Company funded 63 loans for TMG totalling $7,838,277. The average size of such loans was $124,417. In August 1995, the Company commenced business operations with Windtree, and from said date through March 31, 1996, Pioneer funded 81 loans with said customer totaling $7,249,533 The average size of such loans was $89,500. On September 26, 1995 the Company commenced business operations with 1st Financial and funded 49 loans totaling $3,529,393 with said customer through March 1996. The average size of such loans was $72,028. On November 9, 1995 the Company commenced business operations with Home Funding, a FHLMC and FNMA mortgage banker in California, and funded 70 loans with said customer totaling $9,599,530 through March 31, 1996. The average size of such loans was $137,136. As of September 20, 1996, the Company commenced doing business with Citizens, a FNMA mortgage banker which does business in Pennsylvania, New Jersey, Virginia and Delaware. On October 16, 1996, Pacific Crest, a Southern California FNMA mortgage banker was added to the Company's approved list of customers, and on December 16, 1996, AIB, a New York based mortgage banking customer, also was added to the Company's list of approved customers. During the six months ended September 30, 1996, the Company funded a total of 331 loans for five customers aggregating $26,796,269. The average size of such loans was $80,955, and the average duration thereof was 12 days. 210 of such loans aggregating $17,081,344 (average size - $$81.340) were funded for Windtree, 92 of such loans aggregating $6,435,833 (average size - $69,955) were funded for 1st Financial, 15 of such loans aggregating $2,154,724 (average size - $143,648) were funded for Home Funding and 14 of such loans aggregating $1,124,368 (average size - $80,312) were funded for Citizens. 43 The Company is currently analyzing applications from four other potential customers who originate residential family mortgage loans in Arizona, California, Colorado, Nevada, New Mexico, New Jersey, New York, Oregon, South Carolina, Utah and Washington. STANDARDS FOR APPROVAL AS A CUSTOMER In order to be approved as a customer, a mortgage bank must satisfy a set of standards that have been established by the Company. To insure completeness, the process of reviewing and determining whether an applicant has satisfied all of such standards is fully monitored through the CTS, a proprietary set of computer-based standards, procedures and controls designed to manage the risks inherent in the Company's business (see "-- The Collateral Tracking System"). In accordance with those standards: the applicant must be in business a minimum of three years and possess certified financial statements conforming to generally accepted accounting principles the applicant must have been approved by at least two Agencies the applicant must have a minimum net worth of $350,000 an applicant who possesses a net worth of $500,000 or less will be restricted to a warehouse credit line of not more than $2,000,000 the applicant must produce corporate and personal income tax returns covering the three most recent years the applicant must produce banking statements covering the most recent six months of its operations for review by the Company background and reference checks are performed on the customer's principals and its key underwriting personnel a credit analysis is performed using independent certified public accountants the customer's underwriting and quality control standards and procedures are reviewed after thorough screening, the Company determines which of the secondary mortgage market investors (other than GNMA, FNMA and FHLMC), as well as the appraisers, title companies and escrow agents previously used by the customer meet the Company's standards, and 44 only they will be permitted to be used by the customer in connection with loans funded by the Company the customer must carry errors and omissions insurance coverage satisfactory to the Company, and must name the Company as an additional insured under such coverage all title companies, escrow agents and appraisers approved by the Company must carry errors and omissions insurance coverage satisfactory to the Company. All of such title companies and escrow agents must issue insured closing protection letters to the Company with respect to the transactions that the Company funds through each of them the customer's principals must personally guaranty payment of all moneys which the customer will borrow from the Company After a customer has satisfied the Company's application standards, a credit facility is entered into by it and the customer which specifies, among other things, the maximum amount which can be borrowed by the customer under the facility, the maximum percentage of any single mortgage loan that will be advanced, the interest rate and terms of repayment. All funds advanced by the Company under the credit facility are collateralized by a security interest in, among other things, the note and mortgage or deed of trust, as well as all instruments and documents comprising the loan documentation on each loan funded by the Company. THE COLLATERAL TRACKING SYSTEM The Company manages the risks inherent in its business, and prepares, tracks and confirms the on-time delivery of all necessary documents to the appropriate Agency with its CTS, a proprietary set of computer-based standards, procedures and controls which was developed principally by the Company for its business, and not for resale to other mortgage financing companies. The CTS programs enable the Company to avoid the problems caused by, and the monetary losses that can result from, the frequent short-term processing deadlines, the high volume of loan transactions and the complex document structures of mortgage loan financing transactions which are integral parts of the mortgage loan warehouse financing business. Substantial penalties for delay in delivering loan documents to the secondary market, which may range from a surcharge of 1% - 2% of the principal amount of a loan in the case of a delay regarding an individual loan commitment, to a complete rejection and refusal to purchase an entire pool of loans, in the case of a delay in filling a pool commitment, are an integral part of the mortgage loan warehouse financing business. An individual loan surcharge will not have any adverse effect upon the Company, inasmuch as the amount thereof would be 45 deducted from the proceeds of the particular loan which the Company would otherwise be obligated to remit to its mortgage banking customer upon its acceptance and funding by an Agency. However, a delay which would cause an Agency to refuse to purchase a pool, could result in a delay of indeterminate length in replacing the rescinded pool commitment with a new pool commitment from another Agency, or in selling the components of the pool as individual loans. Although the Company would ultimately be compensated for the delay via the generation of higher fees and interest charges payable by its customer on the pool loans in question, the delay could hinder its ability to timely fund additional loans submitted by other customers, and thereby adversely affect its ongoing relations with such other customers as a reliable source of mortgage warehouse financing. Since the Inception Date, none of the individual or pool loans funded by the Company on behalf of its customers has been rejected by reason of a delay in the delivery thereof to an Agency, and the Company has suffered no loss of principal. See "-- The Mortgage Loan Process From Application to a Customer Through Funding." The CTS programs have been modified and altered over time so that they fit the Company's business without seeking to create a standardized exportable system, and they include all phases of the Company's mortgage financing operations in their scope including, but not limited to the following: Establishing a credit line with a mortgage banking customer credit worthiness of the proposed customer background checks of customer's principals quality of loans financed by customer loan underwriting procedures and safeguards use of property appraisers approved by the Company use of title insurance companies approved by the Company Processing of loans to be financed by the Company no funds will be transferred until appropriate verification has been entered into CTS regarding the receipt, generation, review and accuracy of each of the following documents the original mortgage note manually executed by the borrower and properly endorsed a copy of the Agency's commitment to purchase the note a certified copy of the mortgage instrument or deed of trust a duly executed assignment of the mortgage or deed of trust to the Company copies of any intervening assignments a copy of the preliminary Title Report 46 a copy of the appraisal prepared in full compliance with the applicable FHA VA loan guidelines a copy of the borrower's signed loan application - an executed Regulation Z Statement - a power of attorney, when needed a notice of right to cancel, when applicable the Lender's escrow instructions a mortgage insurance certificate, when applicable proof of hazard insurance coverage and payment of the premium therefor a flood insurance certificate, when applicable a copy of Grant/Warrantee Deed, when applicable CTS automatically tracks the presence or absence of each of the foregoing documents with respect to each loan being processed, and provides appropriate on-screen warnings and reports regarding deficiencies in documentation for any loan Funding of Loans CTS keeps track of all amounts funded under its customer's line of credit, automatically determines whether a sufficient balance remains thereunder to fund a particular loan; and updates the available balance information upon transfer of funds CTS generates all documentation pertaining to the transfer of funds to the title company closing a loan, the transmittal and release of loan documents to an Agency, the receipt of funds in payment of loans purchased by an Agency and the distribution of funds to the mortgage bank in repayment of the 2% portion of each loan funded by it THE MORTGAGE LOAN PROCESS FROM APPLICATION BY A CUSTOMER THROUGH FUNDING The Company's customers are Agency-approved mortgage banks that generally originate two categories of mortgage loans which are purchased by such Agencies, i.e., (i) residential mortgage loans which either have been insured by the Federal Housing Administration, insured by the Farmer's Home Administration or guaranteed by the Veteran's Administration (collectively, "FHA/VA Loans"); and (ii) conventional residential mortgage loans, i.e., non-FHA/VA Loans which comply with the requirements for sale to, or conversion into, mortgage-backed securities issued by FNMA or FHLMC ("conforming loans"). The Company is first contacted about a loan to be funded for one of its mortgage bank customers after the mortgage bank has (i) already completed the application review and underwriting process for the loan; (ii) satisfied itself that the 47 loan complies with applicable FHA/VA Loan guidelines, as well as the applicable Agency's loan requirements; and (iii) received a commitment from the Agency to purchase the loan or a pool of loans which will encompass the loan in question. In order to be able to gain access to its mortgage warehouse loan credit facility, the CTS must confirm receipt from the mortgage bank of all of the loan documentation hereinabove discussed. In general, within one day of the CTS's confirmation that all of such documentation has been received, reviewed by the Company's staff and confirmed as to accuracy and completeness, it will wire transfer 98% of the proceeds of the loan to the appropriate escrow agent or title company with instructions to disburse same only upon consummation of the closing, or otherwise return the funds to the Company. At the time of closing, the mortgage banker funds the 2% balance of the loan proceeds. On or shortly before expiration of the Agency Commitment Date, the Company delivers all notes and mortgage instruments comprising the loans to be purchased pursuant to the Agency's commitment to the Agency's payment agent under cover of a "Bailee Flow Letter" which conditions the transfer of title of such documents from the Company to the Agency upon payment to the Company of the aggregate principal amount of the loans being delivered. Upon receipt of such funds from the paying agent, the Company remits a part thereof to its mortgage banking customer equal to the 2% portion of the loan proceeds funded directly by the mortgage bank, less the Company's fees and the interest payable with respect to the funds borrowed from the date of closing of the loan through the date of the Company's receipt of the funds from the Agency's paying agent. By limiting the mortgage loans to those that conform to Agency criteria, which criteria define the prevalent standards for the entire secondary mortgage market, the Company reduces its overall financing risks to those mortgages which are the most liquid and readily acceptable by secondary mortgage market lenders. Furthermore, by insisting on receipt of full documentation with respect to a loan, the Company is assured that if, for any reason, an Agency refuses to accept and pay for a loan subsequent to the closing thereof, the Company will have all of the data and documentation necessary to sell the loan to another Agency, or to a mortgage loan originator or warehouse lender which will seek to pool the loan with other loans and market it in the secondary mortgage market. In the event that an Agency, for any reason, were to fail to accept a loan for purchase under a previously issued commitment, the Company would be able to avail itself of one of the following three options: (i) the Company could require its mortgage banking customer to resubmit the loan to the same Agency after curing the error or other reason for its rejection which, in most cases according to Pioneer's experience, is incomplete or illegible documentation; (ii) the Company could require its customer to sell the loan to another Agency or secondary market institutional investor that will accept mortgage loans on an "as is" basis, in which case, the customer, not the Company, would be required to absorb any loss accruing to such transaction; or (iii) 48 the Company could exercise the right it possesses under the loan and security agreement that it enters into with each of its mortgage banking customers to demand that such customer refund all warehouse financing funds advanced by the Company with respect to the rejected loan upon 24 hours' notice. Between the Inception Date and September 30, 1996, no loan which was approved for funding by the Company failed to close, and every loan which was closed with the Company's funds during said period was sold to one of the Agencies in accordance with the commitments given by them in advance of such closings. During the 18 month period which preceded the November 1989 commencement of Pioneer's Chapter 11 bankruptcy proceedings, less than 100 of the approximately 12,000 loans aggregating approximately $1.3 billion that Pioneer funded were rejected by the Agencies which had originally committed to purchase them. Every one of those rejected loans was sold by Pioneer to another purchaser in the secondary mortgage market. EMPLOYEES As of the date of this Prospectus, the Company has three executives, and three part time loan processors. Although the Company has been accruing a compensation obligation to its Chief Executive Officer and its President at the rate of $55,000 per annum for each executive, it has not paid any portion thereof to either officer, although it is anticipated that such payments will be made prior to the end of the current fiscal year. It is also anticipated that, prior to the end of the current fiscal year, the Company's part time employees will become full time employees and that it will hire up to four additional employees to process the expanded volume of mortgage loan transactions that the Company expects to fund with its use of the net proceeds of the Offering. See "Use of Proceeds". The Company's Chief Executive Officer and Chief Operating Officer have agreed to enter into employment agreements, and its Chief Financial Officer has entered into an employment agreement. See "Management -- Employment Agreements." None of the employees of the Company is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. FACILITIES The Company maintains its office at 6660 Reseda Boulevard, Reseda, California which is occupied pursuant to a five year lease which commenced on November 1, 1996, and which provides for the payment of rent in the amount of $2,178 per month. Following completion of the Offering, the Company intends to lease executive office facilities in New York, New York. COMPETITION - MORTGAGE WAREHOUSE LENDING The business of originating and financing the origination of residential mortgage loans in highly competitive. In order to obtain qualified residential mortgage loans from small to medium sized originating mortgage bankers, the 49 Company must compete with national, regional and local commercial banks and mortgage banking companies who engage in mortgage loan warehouse lending. Many of those institutions and companies, which have longer operating histories and significantly greater resources than those of the Company, are engaged in providing on much greater scales than the Company's resources will permit for the foreseeable future, the same or similar kinds of computer-based bridge financing of residential mortgage loans that Pioneer has heretofore offered to its customers, and which the Company is presently offering. Larger established mortgage warehouse lenders are making substantial investments in their computer operations to achieve significant economies of scale and greater flexibility in rendering services. Also, major bank-related organizations like the Mortgage Warehouse Division of Bank of New York, Bank of America, PNC Bank, and other businesses engaged in lending activities, such as CWM Mortgage Holding, Inc.'s Warehouse Lending Corporation of America, The Associates First Collateral Services and General Electric Capital Corp.'s Residential Funding Corporation are entering or reentering the mortgage warehouse financing business. Similarly, although the Company is not aware of any plans for any of the Agencies to enter the mortgage warehouse lending business, any of these Agencies has the capital, the expertise, and the industry know-how to enter this business in a significant manner. Furthermore, if any of the Agencies did enter this business, it would constitute very strong competition to the Company in its efforts to secure well qualified customers on terms favorable to the Company. Such an increase in competition in the mortgage warehouse business could have a material adverse effect on the Company's business operations and prospects. There can be no assurance that the Company will be able to compete effectively with such competitors, that additional competitors will not enter the market, or that such competition will not make it more difficult for the Company to secure a sufficient number of high quality mortgage banking customers to realize its anticipated business growth. REGULATION - MORTGAGE WAREHOUSE LENDING Although mortgage loan warehousing is not presently subject to federal regulation, the California Finance Lenders Law went into effect July 1, 1995. That law imposes licensing obligations on the Company, requires the filing of annual and periodic reports, establishes maximum interest rates and repayment terms in certain cases, and provides for fines and imprisonment for violation of the law. Other participants in the mortgage warehouse financing process, such as title companies and appraisers, also may be regulated by the states in which they reside and such regulations often determine the scope and approach of the Company's collateral control monitoring program. Furthermore, mortgage banking is a highly regulated industry. The Company's mortgage banking customers are subject to the rules and regulations of, and examinations by, the FHA, VA, GNMA, FNMA, FHLMC and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing residential mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. Potential future changes in these rules and regulations could, among 50 other things, adversely impact its customers' business activities by, among other things, establishing eligibility criteria for mortgage loan warehousing, prohibiting discrimination, providing for inspections and appraisals of properties, requiring credit reports on prospective borrowers, regulating payment features, requiring disclosures to customers, governing secured transactions, establishing collection, repossession and claims handling procedures and other trade practices and, in some cases, fixing maximum interest rates, insurance coverages, fees and loan amounts. Failure to comply with these requirements could lead to loss of approved status, class action lawsuits and administrative enforcement actions. Although the Company is not presently aware of any pending or proposed laws, rules or regulations which, if adopted, would make compliance more difficult or expensive, restrict the Company's ability to fund the warehousing of mortgage loans, restrict the Company's customers' ability to originate or sell mortgage loans, further limit or restrict the amount of interest and other charges earned from loans warehoused by the Company or otherwise adversely affect the business or prospects of the Company, no assurance can be given that limitations and/or restrictions of that nature will not be adopted in the future. PIONEER'S CHAPTER 11 BANKRUPTCY PROCEEDINGS Pioneer was founded in 1980 as a financial services, merchant banking, and mortgage warehouse lending company. Its principal business was the financing of companies within the airline, mortgage, and heavy equipment industries on both a secured and unsecured basis. Pioneer provided working capital loans monthly to regional and commuter airlines, which loans were generally secured by accounts receivable owed by the Airline Clearing House, an agent for participating airlines in the settlement and reconciliation of certain obligations that arise between the participating airlines in the ordinary course of business. In 1988 and 1989, Pioneer processed over $1.3 billion in mortgage warehouse loans which it made to approximately thirty mortgage companies nationwide. In 1989, Presidential Airways ("Presidential"), a United Airlines ("United") "feeder" carrier which was not affiliated with United's corporate structure, and which did business under the name "United Express," owed Pioneer approximately $19 million which was fully collateralized by a perfected security interest in Presidential's accounts receivable, and it owed Pioneer $2 million which was unsecured. At the same time, Presidential also owed United approximately $7.5 million on an unsecured basis. In September, 1989, Presidential informed Pioneer that, pursuant to a demand made by United, Presidential had used $7.5 million of the collateral underlying its $19 million secured indebtedness to Pioneer in order to pay an unsecured debt owed to United. Shortly thereafter, Presidential filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Act. The conversion of Pioneer's collateral essentially eliminated 80% of Pioneer's net worth resulting in the violation of loan covenants that were the 51 financial underpinnings of lines of credit aggregating approximately $130 million which Pioneer maintained with various domestic and international banking institutions. Pioneer's management believes that the cancellation of such credit lines which occurred by reason of such covenant violations resulted in Pioneer's loss of revenues approximating $300,000 per month which otherwise would have been available in the ordinary course of its financing business. In October 1989, Pioneer commenced an action against United in the United States District Court for the Southern District of New York (the "United Litigation") seeking compensatory and punitive damages for United's wrongful conversion of Pioneer's collateral and for tortious interference with the financing agreement between Pioneer and Presidential. After unsuccessfully attempting to formulate an out-of-court settlement of its debts, Pioneer's creditors, over Pioneer's strenuous objections, filed an involuntary petition in bankruptcy in January 1990 seeking liquidation of Pioneer under Chapter 7 of the Bankruptcy Code. After weighing all of its options, Pioneer determined that Chapter 11 would provide Pioneer a means by which it could focus its financial resources on the prosecution of the United Litigation, and thereby provide meaningful recoveries to creditors. At the same time, Pioneer determined that the protection afforded under Chapter 11 would enable Pioneer to reestablish large scale financing operations, either during, or upon the emergence from, Chapter 11. Accordingly, in April 1990, Pioneer voluntarily converted its involuntary Chapter 7 case to a case under Chapter 11 of the Bankruptcy Code. In November 1992, United settled the United Litigation with Pioneer and the lead banks who were Pioneer's principal secured creditors. Such settlement entailed the payment by United of $5.5 million to Pioneer and its creditors, plus Pioneer's receipt of another $500,000 from the liquidation of receivables in which Pioneer held a security interest. In April 1993, Pioneer emerged from bankruptcy in accordance with the terms of the Plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Pioneer's Chapter 11 Bankruptcy Proceedings." THE COMPANY'S ACQUISITION OF TRANS LENDING Pursuant to a stock purchase agreement dated as of December 23, 1996 (the "Stock Purchase Agreement"), the Company has acquired a 50% ownership interest in Trans Lending. In accordance with the Stock Purchase Agreement, the Company is entitled to designate two of the three members of Trans Lending's Board of Directors (Messrs. Goldberg and Housman have been designated by the Company to serve in such capacities), and the Company is entitled to designate the 52 person who will serve as Trans Lending's Chief Executive Officer (the Company has named Mr. Goldberg to serve in that capacity). The Stock Purchase Agreement further provides for Trans Lending's employment of Kenneth Germain, pursuant to a separate employment agreement, as its President and Chief Operating Officer. That employment agreement provides for Mr. Germain's employment for a period of three years commencing on December 23, 1996 at an initial base salary of $96,000 per annum. Also, in accordance with the Stock Purchase Agreement, the Company has entered into a non-compete agreement with Mr. Germain which precludes his engagement in any business activities which would be competitive with Trans Lending's business activities during the term of his employment and for various periods following the termination of his employment, provided that Trans Lending continues to pay the base salary which Mr. Germain shall be entitled to receive as of the date of his termination during such period of non-competition. However, if Trans Lending terminates Mr. Germain's employment without cause, the provisions of the non-compete agreement will preclude him from soliciting the employment of any of Trans Lending's employees, but will not prohibit him from otherwise engaging in competitive activities with Trans Lending. Mr. Germain is the owner of 25% of Trans Lending's outstanding common stock. Alan Mann, who is Mr. Goldberg's son in law, also owns 25% of Trans Lending's outstanding common stock. Mr. Mann has granted an irrevocable proxy to Mr. Germain to vote such shares on all matters coming before a vote of the shareholders of Trans Lending during the three year term of Mr. Germain's employment agreement with Trans Lending. See "Certain Transactions." From May 1989 to January 1992, Mr. Germain was Chairman and Chief Executive Officer of American Lending Corporation, a finance company which originated approximately $30,000,000 of non-prime loans acquired from dealers located in ten states, and sold to MidLantic National Bank. From February 1992 to April 1995, Mr. Germain was Chairman and President of U.S. Lending Corporation, a non-prime automobile lender which acquired Contracts aggregating approximately $45,000,000 during that time period. Between September 1995 and September 1996, Mr. Germain was President of Respect Capital Group, Inc., a Florida based originator of non-prime loans which it acquired for its own account and for the account of other lenders that it represented. THE NON-PRIME AUTO FINANCE INDUSTRY Historically, traditional automobile financing sources have not serviced the non-prime market or have done so only through programs that were not consistently available. An industry group of independent finance companies specializing in non-prime automobile financing is now emerging, but it remains highly fragmented, with no company having a significant share of the non-prime market. 53 The National Automobile Dealers Association ("NADA") estimates that the retail sales market for used vehicles exceeds $100 billion annually in the United States and that new car dealers alone sold over 15 million used vehicles in 1996. Based on NADA statistics, retail sales of used vehicles have steadily increased over the past decade. Sales prices of used vehicles range from high end sales, which generally include vehicles having retail prices above $10,000, to low end sales, which generally include vehicles having retail prices below $5,000. Purchasers of vehicles in the high end category generally have access to traditional sources of credit, such as banks and finance companies. Non-prime borrowers of the low end vehicles generally cannot obtain financing from traditional credit sources and must obtain financing from the small independent car dealers that sell such vehicles, commonly known as "buy here, pay here" dealers. TRANS LENDING'S AUTOMOBILE FINANCING OPERATIONS - OVERVIEW Trans Lending commenced business operations in December of 1996. It operates as a finance company licensed under the laws of the State of Florida, and originates consumer automobile financing transactions for non-prime borrowers (consumers who are typically unable to obtain financing from traditional sources because they have past credit problems (including bankruptcy), have limited or no credit histories and/or have low incomes) by acquiring Contracts from franchised and independent used car dealers. Trans Lending presently represents AVCO, ACC and Norwest who have agreed to purchase Contracts acquired by Trans Lending from approximately 60 dealers located in Florida. THE LENDERS REPRESENTED BY TRANS LENDING Trans Lending presently represents three lenders who have agreed to purchase Contracts acquired by Trans Lending from its dealers. AVCO, a wholly owned subsidiary of Textron Corp., generally will advance 100% of the amount financed (the full lease or contract price less the down payment) on Contracts of up to $25,000 having terms ranging between one and ten years. Trans Lending will receive approximately $700 - $1,000 in combined administrative fees and rate discounts on the amount financed on each Contract which AVCO funds for one of Trans Lending's dealers. Although Trans Lending expects to enter into a written representation agreement with AVCO, no assurance in that regard can be given. OFL-A Receivables Corp. ("O-FLA"), a subsidiary of ACC, has entered into an agreement with Credit Central, Inc, a wholly owned subsidiary of Trans Lending, which provides for the purchase by O-FLA and ACC of Contracts originated by Trans Lending. As in the case of AVCO, O-FLA and ACC generally will advance up to 100% of the amount financed on Contracts of up to $10,000 having terms ranging 54 between one and five years. Trans Lending will receive approximately $700 - $1,000 in combined administrative fees and rate discounts on the amount financed on each Contract which O-FLA and ACC fund for one of Trans Lending's dealers. Trans Lending has contracted with Norwest to service the Contracts originated by Trans Lending, whether owned by Trans Lending or sold as whole loan sales after the acquisition date. See "-- Servicing of Contracts." In addition, Trans Lending's agreement with Norwest provides that Trans Lending will actually purchase and pay for all Contracts to be acquired by Norwest, and hold same for a period of 90 days prior to their transfer to Norwest. In all such instances the Contracts will have been pre-approved by Norwest for its ultimate purchase from Trans Lending. The Contracts which are subject to Trans Lending's agreement with Norwest must be for terms of not more than 24 months and must not exceed $5,000. In addition to the $700 - $1,000 in combined fees and discounts which Trans Lending will earn on each Contract, it will also earn the first two monthly payments which become due and payable during said 90 day holding period. Trans Lending expects to initially utilize approximately $200,000 of its capital in connection with the purchase of Contracts which it will be reselling to Norwest. TRANS LENDING'S BUSINESS STRATEGY Trans Lending's primary business objective is to acquire Contracts originated by franchised car dealers and independent used car dealers initially within the state of Florida, and thereafter throughout the United States. Except in the case of Norwest, upon the acquisition of the Contracts, the originating dealers will assign the installment loans (and the security interests arising from the acquisition thereof) and the leases to Trans Lending's lender. In the case of Contracts originated by Trans Lending for Norwest, the dealers will assign the Contracts and related security interests to Trans Lending, who will warehouse the Contracts, and collect all payments due thereunder for the first 90 days of the terms thereof. At the end of such 90 day period, Trans Lending will assign such Contracts and the related security interests to Norwest. The originating dealers will also provide evidence that proper applications for certificates of title have been made to ensure that the purchaser of the Contract will be named as the lienholder on the certificates of title relating to the financed vehicles. Trans Lending will seek to purchase the Contracts at prices approximating the average wholesale values of the vehicles being financed. In addition, Trans Lending will seek to obtain Contracts with maturities that are less than the remaining useful lives of the vehicles being financed, and which require substantial minimum down payments of 10% (in cash or trade-in vehicle) by the borrowers. The Company may lend up to $2,000,000 of the net proceeds of the Offering to Trans Lending for use in connection with Trans Lending's direct financing of Contracts. See "Use of Proceeds." 55 To achieve the foregoing objectives, Trans Lending has designed criteria as to the price, purchase discount, term, down payment, installments and interest rate for the Contracts and the price, cost to the dealers and average wholesale value of the vehicles to qualify for purchase by Trans Lending's lenders. SALES AND MARKETING Trans Lending will market its financing program primarily to franchised automobile dealers and to a limited number of independent used automobile dealers. Before acquiring Contracts from a dealer for one of Trans Lending's lenders, Trans Lending and the dealer will enter in to an agreement that will provide Trans Lending and/or its lender with recourse to the dealer in cases of dealer fraud or a breach of the dealer's representations and warranties. Trans Lending presently has established Contract acquisition relationships with approximately 60 dealers located in the State of Florida. Over the next 12 months, Trans Lending's management intends to seek authority to conduct business in several competing markets, including Georgia, Texas, North Carolina, Virginia, Pennsylvania, Tennessee and Ohio. Trans Lending will seek to increase its representation of additional dealers in Florida, and to establish such relationships with other dealers located elsewhere in the United States. No assurance can be given that Trans Lending will be successful in that regard, or if it successfully establishes such relationships, that it will be able to maintain them. In the absence of establishing and maintaining a greater number of Contract acquisition relationships with a greater number of dealers located within Florida and elsewhere, Trans Lending's business would be materially adversely affected. See "-- Regulation -- Non-Prime Automobile Financing;" and "-- Competition -- Non-Prime Automobile Financing." As of the date of this Prospectus, Trans Lending has three sales representatives on salary covering the State of Florida. The salesrepresentatives regularly meet with dealers, provide information about Trans Lending's program, train dealer personnel as to Trans Lending's program requirements and assist dealers in identifying consumers who qualify for Trans Lending's program. APPLICATION PROCESSING AND PURCHASE CRITERIA Dealers will submit credit applications to Trans Lending's credit center, typically by facsimile. Upon Trans Lending's receipt of a credit application, a credit processor employed by Trans Lending will use an automated, computer-based system to obtain credit histories, determine the wholesale value of the vehicle and calculate the credit score of the application. Trans Lending's credit officers will use the credit score as a guide to evaluate applications, but the approval/declination decision will not be based solely on the credit score. Trans Lending then will notify the dealers by facsimile of a credit decision, usually within three hours of receipt of the application. Trans Lending then will submit the completed package to its lender for funding. 56 SERVICING OF CONTRACTS Trans Lending has contracted with NorWest to service the Contracts it will originate, whether owned by Trans Lending or sold as whole loan sales after the acquisition date. Norwest's servicing will include payment and payoff processing, collecting, insurance tracking, title tracking, responding to borrower inquiries, investigating delinquencies, repossessing and reselling collateral, collection reporting and credit performance monitoring. EMPLOYEES As of the date of this Prospectus, Trans Lending has six full time employees, including its three Florida sales representatives. Trans Lending is not a party to any collective bargaining agreement. COMPETITION - NON-PRIME AUTOMOBILE FINANCING The non-prime consumer automobile finance market is highly competitive. The level of competition has increased significantly in recent years and this trend is expected to continue. Historically, commercial banks, savings and loan associations, credit unions, captive finance subsidiaries of automobile manufacturers and other consumer lenders, many of which have significantly greater resources than Trans Lending, have not competed for non-prime consumer business. To the extent that such lenders expand their activities in the non-prime consumer market,Trans Lending's financial condition and results of operations could be materially adversely affected. During the past two years, several companies have devoted considerable resources to the non-prime consumer market, including well-capitalized public companies. Specifically, Ford Motor Credit Company has begun to finance non-prime consumers, General Electric Capital Corporation established strategic alliances with several regional non-prime consumer automobile finance companies and KeyCorp. acquired AutoFinance Group, Inc., one of Trans Lending's competitors. Other companies, including Mellon Bank Corporation and Southern National Corporation, have also entered the market. Trans Lending's business is also affected by certain demographic, economic and industry trends. These trends include increased sales of used cars, rising new car prices relative to used car prices, stability in non-prime consumers' demand for used cars, the inability of non-prime consumers to find lower cost financing from other sources and the overall level of interest rates in general. A reversal of any of these trends or a change in any of these conditions could have a material adverse effect on Trans Lending's financial condition and results of operations. REGULATION - NON-PRIME AUTOMOBILE FINANCING 57 Trans Lending is registered as a finance company in the State of Florida, and will be required to comply with similar registration regulations in many of the other states where it will be conducting business. Each of such states will subject Trans Lending to varying degrees of regulation and periodic examination. In addition, numerous federal and state consumer protection laws impose requirements upon the origination and collection of consumer receivables. The laws of some states impose finance charge ceilings and other restrictions on consumer transactions and may require certain contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In addition, certain of these laws make an assignee of such loan liable to the obligor thereon for any violations by the assignor. Trans Lending must verify the accuracy of disclosure for each Contract that it will be purchasing; however, if it becomes an assignee of the accounts receivable due under any Contracts, it may be unable to enforce some of its receivables or may be subject to liability to the obligors under some of its receivables if such receivables do not comply with such laws. In the event of default by an obligor on a Contract purchased by Trans Lending, it will be entitled to exercise the remedies of a secured party under the Uniform Commercial Code ("UCC") in effect in the state of residence of the obligor. The UCC remedies of a secured party include the right to repossession by self-help means, unless such means would constitute a breach of the peace. Unless the obligor voluntarily surrenders a vehicle, self-help repossession by an independent repossession specialist engaged by Trans Lending generally will be employed by Trans Lending when an obligor defaults. Self-help repossession is accomplished by retaking possession of the vehicle. If a breach of the peace is likely to occur, or if applicable state law so requires, Trans Lending will be obligated to obtain a court order from the appropriate state court and repossess the vehicle in accordance with that order. In most jurisdictions, the UCC and other state laws require the secured party to provide the obligor with reasonable notice of the date, time and place of any public sale or the date after which any private sale of the collateral may be held. Unless the obligor waives his rights after default, the obligor in most circumstances would have the right to redeem the collateral prior to actual sale by paying the secured party all unpaid installments of the receivable plus reasonable expenses for repossessing, holding, and preparing the collateral for disposition and arranging for its sale, plus in some jurisdictions, reasonable attorneys' fees, or, in some states, by payment of past-due installments. It is anticipated that repossessed vehicles generally will be resold by Trans Lending through wholesale auctions which are attended principally by automobile dealers. LITIGATION PROCEEDINGS The Company is not a party to any litigation proceedings. 58 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
Name Age Position Arthur H. Goldberg 54 Chairman of the Board, Chief Executive Officer, Director Elie Housman 59 President, Director Glenda Klein 53 Director, Senior Vice President, Secretary, Treasurer and Chief Financial Officer Richard Fried 50 Director Boaz Harel 40 Director Tamar Lieber 54 Director Mark Roth 35 Director
Mr. Goldberg is one of the original shareholders of, and was the pre-Merger Chairman of the Board and President of PCF. He was appointed to Pioneer's Board in February 1994. Upon consummation of the Merger, he relinquished his positions as Chairman and President of the Company to Mr. Lieber, but continued to serve as a director of the Company. Following Uri Lieber's death in March 1995, Mr. Goldberg assumed the positions of Chairman of the Board and Chief Executive Officer. Since December 1993, Mr. Goldberg has served as President of Manhattan Associates, LLC, a merchant banking and investment banking firm. Between April 1990 and December 1993, he served as Chairman of Reich & Co., a securities brokerage and investment banking firm which is a member of the New York Stock Exchange. Prior thereto, he served as President and Chief Operating Officer of Integrated Resources, Inc. ("Integrated"), a diversified financial services company which commenced proceedings under Chapter 11 of the Bankruptcy Code. In November 1994, Integrated's sixth amended reorganization plan was consummated. In accordance therewith, senior creditors of the reorganized company (now known as Presidio Capital Corp. ("Presidio")) may receive as much as 70% of their original claims totalling approximately $1.1 billion, and junior creditors will receive between 3.1% and 4.5% of their claims of approximately $672 million. As of December 31, 1995, holders of allowed and disputed Integrated 59 senior general unsecured and subordinated claims (aggregating approximately $1.9 billion) received Presidio's 8.8 million Class A common shares ("Class A Shares"), and 8.8 million shares of the common stock of XRC Corp., a Delaware corporation which succeeded to assets of Integrated with a net value of less than $5 million pursuant to Integrated's plan of reorganization. A reserve for disputed claims in Integrated's bankruptcy case was established and funded by Presidio with $46 million in cash and 162,932 Class A Shares. At December 31, 1995 approximately $7 million in cash and 47,081 shares remained in reserve. Mr. Goldberg is a trustee of Ramco Gershenson Property Trust, a New York Stock Exchange listed real estate investment trust. Mr. Housman is one of the original shareholders of, and was a director, Vice President and Secretary of, PCF. He was appointed to Pioneer's Board in February 1994, and his position as a director of the Company continued upon consummation of the Merger. Following Mr. Lieber's death in March 1995, Mr. Housman assumed the position of President of the Company. Since 1989, Mr. Housman has been Managing Director and Principal of Charterhouse Group International, a privately held merchant bank. Prior thereto, Mr. Housman engaged in financial and business consulting through E. Housman, Inc., a corporation wholly owned by him. Mr. Housman is also President, Chief Operating Officer and a director of Satellite Tracking Technologies, Inc., a privately held company. Ms. Klein joined Pioneer in 1986 as a Vice President, and served as its Senior Vice President and Secretary since 1988. She has served as a director of Pioneer since 1993, and was appointed to serve as Pioneer's Treasurer and Chief Financial Officer in 1994. She assumed the same directorial and official positions with the Company upon consummation of the Merger. In 1993 Mrs. Klein and her husband filed a petition pursuant Chapter 7 of the Bankruptcy Code. After receiving a discharge in bankruptcy, Mr. and Mrs. Klein reopened the bankruptcy proceedings and converted same to a case under Chapter 11 of the Bankruptcy Code. In April 1995, Mr. and Mrs. Klein deposited $100,000 into the Bankruptcy Court for the purpose of paying in full, with interest, any of the creditors of their bankrupt estate who had filed claims against in said proceedings. In October 1995, such proceedings were closed. Mr. Fried was appointed to Pioneer's Board in February 1994. Upon consummation of the Merger, he became a Vice President and director of the Company. He relinquished his position as an officer in November 1996. From December 1986 through February 1991, Mr. Fried was a shareholder, President and Chairman of Kanon Bloch Carre & Co., Inc., an SEC registered investment advisor and stock brokerage firm which was an NASD member firm. Between February 1991, when said firm was sold to an unrelated party, and June 1991, he was engaged as a business consultant. In addition thereto, (i) since June 1991, Mr. Fried has served as President of Medical Systems, Inc., an application software developer, and he has been a principal shareholder thereof since June 1993; (ii) since February 1993, he has also served as President of Montgomery Associates, Inc., a corporation wholly 60 owned by him which is engaged in business as an importer-exporter; (iii) since April 1993, Mr. Fried has been a principal shareholder, and has served as President of Sea Change Systems, Inc., a software tools developer; (iv) from April 1993 to May 1994, he was a Branch Manager of LPL Financial Services, a stock brokerage firm which is an NASD member firm; (v) since November 1994, Mr. Fried has been a controlling shareholder and has served as President of Smartpay, Inc., a collection service; and (vi) since October 1996, Mr. Fried has been a controlling shareholder, and has served as President of Leeward Software, Inc. d/b/a Advanced Medical Systems, an application software developer. Mr. Harel was appointed to the Board, effective November 11, 1996. Mr. Harel has been the Managing Director of Leedan Business Enterprise Ltd., ("Leedan") a publicly held Israeli holding company which has a class of securities listed on the Israeli Stock Exchange. Leedan's holdings include ICTS Holland Production, B.V. ("ICTS Holland"), a publicly held provider of enhanced aviation security services which has a class of securities listed on the Nasdaq Stock Market. From 1991 to 1993, Mr. Harel was the founder and managing director of Mashik Business and Development Ltd., an engineering consulting company. Since September 1996, and in addition to his capacity as the Managing Director of Leedan, Mr. Harel relocated to New York and has served as the Chairman of ICTS USA (1194), Inc., a wholly owned subsidiary of ICTS Holland, and in this capacity, he has been responsible for the business development of ICTS Holland in the United States. Leedan Systems & Properties Promotion 1993 Ltd. ("Leedan Systems"), one of the Company's principal shareholders, is an affiliate of Leedan. See "Principal Security Holders." Mrs. Lieber was appointed to the Board on June 5, 1995 to fill the vacancy created by reason of the death of her husband, Uri Lieber, the former Chairman and Chief Executive Officer of the Company. Mrs. Lieber has been engaged in private practice as a psychotherapist for more than the past five years. Mr. Roth was appointed to the Board, effective November 11, 1996. Mr. Roth is an attorney who engaged in the private practice of law between 1989 and September 1995. In 1992, Mr. Roth began representing National Securities Corporation ("National"), the underwriter of the Company's IPO, in transactional and litigation matters. He became a full time employee of, and was appointed General Counsel of, National in October 1995, and continues to serve in that capacity. In accordance with the underwriting agreement executed by the Company with National in connection with the IPO, National is entitled to designate one member of the Company's Board during the three year period which commenced on August 16, 1996. Mr. Roth was appointed to the Board as National's designee. See "Certain Transactions." 61 EXECUTIVE COMPENSATION Prior to the Merger, the Company did not pay any form of compensation to any of its executives. The following table sets forth compensation awarded to, earned by or paid to Uri Lieber and Arthur Goldberg in their capacities as Chief Executive Officer of the Company. No executive officer of the Company earned a salary and bonus of more than $100,000 during any of the three fiscal years ended March 31, 1996. The Company has agreed to enter into employment agreements with Arthur H. Goldberg and Elie Housman, and has entered into an employment agreement with Glenda Klein. See "Management Employment Agreements." The Company did not, prior to commencement of its fiscal year ending March 31, 1996 (a) grant any restricted stock awards or stock appreciation rights to any of its executives; (b) pay compensation to any of its executives that would qualify as "All Other Compensation;" or (c) make payments to any of its executives which may be categorized as "Other Annual Compensation" or "LTIP Payouts."
Other Securities Annual Restricted Underly- Name and Fiscal Compen- Stock ing Principal Year Salary($) Bonus($) sation($) Awards($) Options/ Position ----- --------- -------- --------- ---------- SARs (#) - -------- ----------- Uri Lieber Former CEO 1995 $55,747(1) --- $6,924(2) --- --- 1994 41,392 --- 1,079(2) --- --- Arthur Gold- berg, CEO 1996 --- --- --- --- 75,758/0
- ------------------------ (1) Represents compensation paid to Mr. Lieber through the date of his death. The Company also has accrued approximately $36,000 representing amounts due to Mr. Lieber under his employment agreement with the Company. (2) Represents the premiums paid by the Company with respect to term life insurance owned by Mr. Lieber and payable to his designated beneficiary. EMPLOYMENT AGREEMENTS Prior to his death in March 1995, the Company was party to an employment agreement with Uri Lieber, the former Chairman and President of Pioneer, which: (a) provided for Mr. Lieber's employment as Chairman and Chief Executive through June 30, 1996; (b) provided for base compensation to Mr. Lieber at 62 the rate of $110,000 per annum, subject to such discretionary increases and bonuses as the Compensation Committee of the Board of Directors may deed appropriate; (c) obligated the Company to pay the premiums with respect to two term life insurance policies owned by Mr. Lieber and payable to his designated beneficiary in the aggregate amount of $1,200,000, or to provide similar insurance benefits with other policies to be purchased by the Company; (d) obligated the Company to provide to Mr. Lieber all categories of benefits offered to other executives and employees; (e) terminated upon Mr. Lieber's death, and was terminable by the Company upon his disability or in the event of his gross malfeasance, gross misconduct, conviction of a felony, or other similar good cause materially detrimental to the Company; and (f) also provided for Mr. Lieber's indemnification, subject to any limits imposed thereof by law, and/or the Company's Certificate of Incorporation and By-Laws, with respect to certain claims which may be brought against him, and to pay his legal defense costs in connection therewith. Messrs. Goldberg and Housman have agreed to enter into employment agreements with the Company, pursuant to which Mr. Goldberg will devote substantial portions of his time to the affairs of the Company as Chairman and Chief Executive Officer, and Mr. Housman will devote substantial portions of his time to the affairs of the Company as President and Chief Operating Officer. Although the terms of such agreements have not been fully negotiated as of the date of this Prospectus, the Company believes that each agreement will have a term of three years, will provide for payment of base compensation at the rate of $75,000 per annum and also provide for the receipt by Messrs. Goldberg and Housman of all other perquisites and benefits conferred by the Company to any other officer. The agreements will further provide for the indemnification of Messrs. Goldberg and Housman to the fullest extent permitted by applicable law with respect to all claims for compensatory damages (but not punitive damages or the expenses incurred by her in defending against such claims) alleged against them in any action, suit or proceeding commenced against them by reason of their status as present or former officers, directors or employee of the Company, or any subsidiary or affiliate of the Company, including actions brought by or in the right of the Company to procure a judgment in its favor. As an inducement to Messrs. Goldberg and Housman to enter into such employment agreements with the Company, the Board has authorized the Company to grant to each of them a five year option to purchase 350,000 shares of Common Stock, subject to a three year vesting schedule, which shall be exercisable at a price of $1.99 per share, subject to the consummation and execution of such employment agreements, and the receipt of appropriate shareholder authorization. See "Description of Securities - -- Options Issued to Executives." The Company has entered into an employment agreement with Glenda Klein, which: (a) provides for Ms. Klein's employment as Senior Vice President, Secretary, Treasurer and Chief Financial Officer through March 31, 1997; (b) provides for base compensation to Ms. Klein at the rate of $90,000 per annum during the first year of the term and $100,000 per annum during the second year of 63 the term; (c) provides for the grant of a five-year option to purchase 75,758 shares of Common Stock of the Company exercisable at a price of $5.00 per share; (d) provides for the grant of a second five-year option on May 1, 1996, provided that Ms. Klein is still employed by the Company on said date, entitling her to purchase 37,879 shares of Common Stock of the Company at a price of $5.00 per share; (e) obligates the Company to pay the premiums with respect to a term life insurance policy payable to Ms. Klein's designated beneficiary in the aggregate amount of $750,000 during the first year of the term and $1,000,000 during the second year of the term; (f) obligates the Company to pay the premiums with respect to a long-term disability policy in an amount sufficient to cover the salary payable to Ms. Klein pursuant to the employment agreement; (g) obligates the Company to lease a vehicle for use by Ms. Klein during the two-year term of the employment agreement (which lease payments shall not exceed $800 per month) and to pay all associated insurance, gasoline and maintenance costs for such vehicle; (h) obligates the Company in the event of the termination of Ms. Klein's employment in connection with a change in control of the Company to pay to her the balance of the salary payable under the employment agreement plus an additional $100,000 and to continue medical coverage for the balance of the two-year term; (i) obligates the Company to provide to Ms. Klein and her spouse medical and vision coverage; and (j) terminates upon Ms. Klein's death, and is terminable by the Company upon her disability or in the event of her gross malfeasance, gross misconduct, conviction of a felony, or other similar good cause materially detrimental to the Company. The Company has also agreed to indemnify Ms. Klein, pursuant to said agreement, to the fullest extent permitted by applicable law with respect to all claims for compensatory damages (but not punitive damages or the expenses incurred by her in defending against such claims) alleged against Ms. Klein in any action, suit or proceeding commenced against her by reason of her status as a present or former officer, director or employee of the Company, or any subsidiary or affiliate of the Company, including actions brought by or in the right of the Company to procure a judgment in its favor See "Management - Executive Compensation - Stock Option Plan;" and "Description of Securities - Options Issued to Executives." COMPENSATION PAYABLE TO, AND OPTIONS ISSUED TO OTHER EXECUTIVES In June 1995, the Board authorized the Company to pay salaries to each of Messrs. Goldberg and Housman in the amount of $55,000. However, the Company has not paid any portion thereof to either officer, although it is anticipated that such payments will be made prior to the end of the current fiscal year. In consideration of the services to be rendered by Messrs. Goldberg and Housman without payment of salaries between June 1995 and the closing of the IPO, the Company issued five year options to each of them to purchase 75,758 shares of Common Stock at an exercise price of $5.00 per share. Such options were not issued pursuant to the Company's Incentive Stock Option Plan. See "Description of Securities - Options Issued to Executives." 64 STOCK OPTION PLAN The Company, pursuant to the shareholders' authorization, has adopted (with effect from August 1, 1994) a Non-Qualified Stock Option Plan (the "Plan") which provides for the issuance of options to purchase up to 151,515 shares of Common Stock to persons who are at the time of grant, employees (including officers and directors who are employees) of, or consultants to, the Company. The Plan must be administered by the Compensation Committee of the Board of Directors of the Company. Such committee must consist of two "non-employee directors," as such term is defined by Rule 16b-3 of the Exchange Act ("Rule 16b-3"). The Plan, as modified with effect from November 4, 1994, further provides for the automatic issuance of options to non-employee directors of the Company pursuant to a formula which satisfies the requisites of Rule 16b-3. On January 2 in each of 1997, 2000 and 2003 (each of which dates is hereinafter called a "Regular Grant Date"), each non-employee director shall automatically receive an option to purchase 15,000 shares of the Company's Common Stock (a "Regular Option"), and such Regular Option shall vest and become exercisable on the first, second and third anniversaries of such grant at the rate of 5,000 shares per anniversary, provided, that each person who becomes a director after a Regular Grant Date, shall receive a Regular Option to purchase a pro rata portion of 15,000 shares of Common Stock based upon the number of months remaining until the next Regular Grant Date. Also in accordance with such formula, on the date of each non-employee director's initial election to the Board or, if such initial election shall have occurred prior to the date of adoption of the Plan, then on said date of adoption, he or she shall automatically receive an option to purchase a prorata portion of 15,000 shares of Common Stock based upon the number of months remaining until the next Regular Grant Date (an "Initial Option"). No Initial Option or Regular Option shall vest or be exercisable unless the grantee shall have served continuously on the Board during the year preceding the applicable vesting date. Michael Barnea, Esq., a former director of the Company, is the holder of 7,892 fully vested options. Boaz Harel and Mark Roth, Esq., who were appointed to the Board in November 1996, and Richard Fried, who qualified for receipt of a grant as a director upon cessation of his status as a Vice President in November 1997, have received Initial Options to purchase 316 shares of Common Stock. The grants to Messrs. Harel and Roth will not vest until November 1997. The grant to Mr. Fried is fully vested. In addition, Messrs. Fried, Harel and Roth will receive Regular Grants in January 1997. By reason of the fact that Mrs. Lieber is deemed to be the beneficial owner of all the Common Stock which her late husband owned, i.e., more than 10% of the total number of shares of Common Stock outstanding, she is ineligible to receive any grants under the Plan. See "Principal Security Holders." No other options have been granted under the Plan as of the date of this Prospectus. 65 The exercise price for all options issuable under the Plan must be 100% of the fair market value of the Common Stock underlying the option at the time of grant. Pursuant to the Plan, as long as the Common Stock is listed on the Nasdaq SmallCap Market, its fair market value shall be equal to the closing sales price thereof on the date of grant. In November 1996, Glenda Klein received an option issued under the Plan to purchase 75,000 shares of Common Stock at an exercise price of $1.99 per share. Mrs. Lieber and Richard Fried, who are non-employee directors, serve as the Compensation Committee of the Company's Board of Directors. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article VIII of the Company's bylaws provide for the indemnification of directors and officers to the fullest extent permitted by law. Section 722 of the New York Business Corporation Law (the "BCL") provides that a corporation may indemnify an individual made party to a proceeding because he is or was a director or officer in certain situations, provided that the director acted in good faith for a purpose which he reasonably believed to be in the best interests of the corporation. In addition, Section 723 of the BCL provides that a corporation shall indemnify a director or officer who prevails entirely in the defense of any proceeding to which he was a party because he is or was a director, against reasonable expenses incurred by him in connection with the proceeding. Section 724 of the BCL provides that, notwithstanding any action taken by the corporation, or by its shareholders or directors to deny indemnification to any officer or director, he may apply for and receive such indemnification, upon good cause shown, to the same extent permitted under BCL Section 722 upon application for such relief to the appropriate court. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The Company maintains directors' and officers' liability insurance providing for limits of $1,000,000 per occurrence. The Company intends to enter into employment agreements with Arthur H. Goldberg, Elie Housman, and it has entered into an employment agreement with Glenda Klein, providing for the Company's indemnification of each of such individuals to the fullest extent permitted by law. The Company has 66 entered into indemnification agreements with its other directors which also shall provide for indemnification to the fullest extent permitted by law. See "Management - Employment Agreements." DIRECTORS' COMPENSATION Directors do not receive cash compensation for services rendered to the Company in such capacity. Non-employee directors are reimbursed for the reasonable costs of travel to and from meetings of the Board of Directors. CERTAIN TRANSACTIONS In September 1994, Pioneer borrowed an aggregate of $411,000 and paid interest thereon at 7.75% per annum with respect to $120,000 borrowed from Tamar Lieber, the widow of Uri Lieber, at 10% per annum on $100,000 borrowed from RDA Trading Company, Inc. a corporation solely owned by Michael Loewenthal, one of the Company's shareholders, on $150,000 borrowed directly from Mr. Loewenthal at 12% per annum, and on $41,000 borrowed from Hedy Goldberg, the wife of Arthur H. Goldberg, a shareholder and Chairman of the Board and Chief Executive Officer of the Company. $20,000 of such borrowings was repaid to Mrs. Lieber in September, 1994, and the balance thereof, plus interest in the aggregate amount of approximately $2,110, was repaid to the lenders on October 11, 1994. During the relevant period, the interest rate charged by UMB for funds borrowed under Pioneer's credit line with that institution was 8.75%. Although, Pioneer paid higher interest rates with respect to $291,000 of such borrowings from Mrs. Goldberg, RDA and Mr. Loewenthal, it was not required to pay any fees to such lenders. Accordingly, the actual cost of such funds was approximately $480 less than such borrowings would have cost if effected under the UMB credit line. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In November 1995 the Company borrowed $35,000 from Glenda Klein, $38,000 from Tamar Lieber and $40,000 from Dr. Theodore Reingold, a former officer and director of Pioneer. Each of such loans earned interest at the prime rate published from time to time by the Wall Street Journal plus 1/4% per annum, pursuant to a revolving credit and security agreement which provided that advances under such lines were secured by the mortgage liens created as a result of the loans funded with such advances. Mrs. Klein was paid a fee of $588.17 to cover the penalties she incurred from the early redemption of certificates of deposit which were used to provide such loan funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 67 Although no specific measures to resolve conflicts of interest have been formulated, the officers and directors of the Company have a fiduciary obligation to deal fairly and in good faith with the Company. The Company's management believes that the terms and conditions pertaining to each of the foregoing transactions were comparable to and competitive with the terms and conditions which it would have obtained if such transactions had been effected with persons and entities unaffiliated with the Company. All ongoing and future transactions between the Company and any of its affiliates will be no less favorable to the Company than such transactions would be if consummated with unaffiliated third parties, and will be approved by a majority of the Company's disinterested directors. The directors intend to exercise reasonable judgment and take such steps as they deem necessary under all of the circumstances in resolving any specific conflict of interest which may occur and will determine what, if any, specific measures, such as retention of an independent advisor, independent counsel or special committee, may be necessary or appropriate. There can be no assurance that the Company will employ any of such measures or that conflicts of interest will be resolved in the best interest of the shareholders of the Company. The Company has agreed to enter into employment agreements with Arthur H. Goldberg and Elie Housman, and it has entered into an employment agreement with Glenda Klein, who are shareholders and directors, and respectively, the Chairman and Chief Executive Officer, the President and Chief Operating Officer and the Senior Vice President, Secretary, Treasurer and Chief Financial Officer of the Company. See "Management -- Employment Agreements." During the years ended March 31, 1995 and 1996, the Company paid Glenda Klein's husband, Philip Klein, $10,284 and $815, respectively, for accounting services rendered by him. Mr. Klein is a certified public accountant. During the year ended March 31, 1995, the Company paid Glenda Klein's son, Andrew Klein, $4,007 for office-administrative services which he rendered to the Company. During the year ended March 31, 1996, the Company paid Oren Lieber, the son of Uri and Tamar Lieber, $2,291 for office-administrative services which he rendered to the Company. In accordance with the underwriting agreement executed by the Company with National in connection with the IPO, National is entitled to designate one member of the Company's Board during the three year period which commenced on August 16, 1996. Mark Roth, Esq. was appointed to the Board as National's designee on November 11, 1996. See "Management -- Executive Officers and Directors." Alan Mann, Arthur's Goldberg's son in law, owns 25% of the outstanding common stock of Trans Lending. Mr. Goldberg disclaims beneficial ownership of such shares, as well as any voting or investment powers pertaining thereto. Mr. Mann has granted an irrevocable proxy to Kenneth Germain to vote such shares on all matters coming before a vote of the shareholders of Trans 68 Lending during the three year term of Mr. Germain's employment agreement with Trans Lending. See "Business -- The Company's Acquisition of Trans Lending." PRINCIPAL SECURITY HOLDERS The following table sets forth the holdings of the Common Stock of the Company as of the date of this Prospectus by (1) each person or entity known to the Company to be the beneficial owner of more than five percent (5%) of the outstanding shares of common stock of the Company; (2) each director and named executive officer; and (3) all directors and executive officers as a group. All of the holders of the Company's Common Stock are entitled to one vote per share. See "Description of Securities."
Common Stock ------------------------------------------------- Name and Address of Number of Shares Percent Owned Prior Percent Owned After Beneficial Owner Beneficially Owned to Offering (1) Offering (2) - ------------------- ------------------ ------------------- ------------------- Tamar Lieber (3) 322,122 22.3 6.2 Leedan Systems (4) 176,136 12.2 3.4 Boaz Harel (5) * * * Mark Roth (6) * * * Elie Housman (7) 131,411 (8) 8.6 2.5 Arthur H. Goldberg (9) 168,513 (10) 11.1 3.2 Richard Fried (11) 12,362 (12) * * Glenda Klein (13) 191,046 (14) 13.2 3.5 All Directors and Executive Officers as a Group (6 persons) 1,165,607 (15) 65.4 21.0
- -------------------- * Represents less than one percent (1) Based on 1,442,272 shares of Common Stock outstanding as of the date of this Prospectus. (2) Based upon 5,192,272 shares of Common Stock outstanding after the Offering. Does not include (a) up to 1,125,000 shares of Common Stock issuable in the events that (i) the Underwriters' over-allotment option is fully exercised; and (ii) the Class A Warrants to be issued in connection therewith are fully exercised; or (b) up to 750,000 shares of Common Stock issuable in the events that (i) the Representative's 69 Warrants are fully exercised; and (ii) the Class A Warrants to be issued in connection therewith are fully exercised. See "Underwriting." (3) Mrs. Lieber's address is 160 West 66th Street, New York, New York. (4) The address of Leedan Systems is c/o Harel & Partners, 555 Madison Avenue, New York, New York. The Company believes that Leedan Systems is controlled by Ezra Harel, the brother of Boaz Harel. (5) Mr. Harel's address is c/o Harel & Partners, 555 Madison Avenue, New York, New York. (6) Mr. Roth's Address is c/o National Securities Corporation, 1001 Fourth Avenue, Seattle, Washington. (7) Mr. Housman's address is 535 Madison Avenue, 28th floor, New York, New York. (8) Includes 75,758 shares which Mr. Housman has the right to acquire within 60 days from the date hereof upon exercise of an option. Percentages shown assume full exercise of such option. Does not include 350,000 shares of Common Stock which shall be issuable upon exercise of a five year option to be granted to Mr. Housman upon consummation of an employment agreement with the Company, subject to approval by the Company's shareholders under New York law, 18,551 shares of the Company's Common Stock held by Daniel Housman, and 18,551 shares of the Company's Common Stock held by Jon Housman, who are Mr. Housman's sons. Mr. Housman disclaims beneficial ownership of such shares, as well as any voting or investment powers pertaining thereto. See "Certain Transactions." (9) Mr. Goldberg's address is 375 Park Avenue, New York, New York. See "Certain Transactions." (10) Includes 75,758 shares which Mr. Goldberg has the right to acquire within 60 days from the date hereof upon exercise of an option. Percentages shown assume full exercise of such option. Does not include 350,000 shares of Common Stock which shall be issuable upon exercise of a five year option to be granted to Mr. Goldberg upon consummation of an employment agreement with the Company, subject to approval by the Company's shareholders under New York law. (11) Mr. Fried's address is 3 Centennial Drive, Suite G, Peabody, Massachusetts. (12) Includes 316 shares which Mr. Fried has the right to acquire within 60 days from the date hereof upon exercise of an option. (13) Ms. Klein's address is 6660 Reseda Boulevard, Suite 108, Reseda, California. 70 (14) Includes 188,637 shares which Ms. Klein has the right to acquire within 60 days from the date hereof upon exercise of an option. Does not include 1,205 shares of Common Stock held by Ms. Klein's daughter, Allyson. Ms. Klein disclaims beneficial ownership with respect to such shares, as well as any voting or investment powers pertaining thereto. Percentages shown assume full exercise of all of such options. (15) Includes 340,469 shares which the holders thereof have the right to acquire within 60 days from the date hereof upon exercise of an option held by them. Percentages shown assume full exercise of all of such options. DESCRIPTION OF SECURITIES GENERAL The Company, a New York corporation, is authorized to issue 25,000,000 shares, of which 20,000,000 may be Common Stock, $.01 par value, and 5,000,000 may be preferred shares,$.01 par value, which may be authorized for issuance by the Board and issued without further action by the shareholders in classes or series possessing such designations, powers, preferences and relative, participating, optional or other special rights within each class or series, and further possessing such qualifications, limitations and restrictions as the Board may determine, subject to any limitations imposed thereon by the Company's Certificate of Incorporation. UNITS Each Unit consists of one share of Common Stock and one Class A Warrant. COMMON STOCK As of the date of this Prospectus, 1,442,272 shares of Common Stock are issued and outstanding. Except as otherwise required by law, each holder of Common Stock is entitled to one vote per share on all matters on which shareholders are entitled to vote. There are no cumulative voting rights regarding elections of directors. Holders of shares of Common Stock are entitled to share pro rata in dividends, if any, as may lawfully be declared on the Common Stock from time to time by the Company's Board of Directors. PREFERRED STOCK 71 The Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including divided rights, conversion rights, voting rights terms of redemption, liquidation preferences and the number of shares constituting any series and the designation of such series. The issuance of preferred stock could, among other things, adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. As of the date of this Prospectus, no shares of preferred stock of any class or series have been issued, or have been authorized to be issued by the Board. The Company has no present intention to issue any preferred shares in the foreseeable future, However, no assurance can be given regarding the change of such intentions in the event that the Board deems it appropriate to issue such securities in connection with any transaction or other circumstance which is not presently known to the Board. CLASS A WARRANTS The redeemable Class A Warrants will be exercisable at a price of the Market Price per share at any time during the five year period commencing on , 1997 and ending on , 2002 (the "Exercise Period"). Unless exercised, the Class A Warrants will automatically expire at 3:00 p.m., New York time on , 2002. As used in this Prospectus, the term Market Price means the lower of the last sale price of the Common Stock on the Nasdaq SmallCap Market on the trading day immediately preceding the date of this Prospectus, or the average of the last sales prices of the Common Stock on the Nasdaq SmallCap Market for the 30 trading days immediately preceding the date of this Prospectus. The Class A Warrants, which will be issued pursuant to a warrant agreement between the Company and American Stock Transfer & Trust Company, will be in registered form and will be saleable, assignable, and conveyable separately and apart from the Units and Common Stock. Commencing one year after the date of this Prospectus and continuing through the end of the Exercise Period, the Company, at its option, upon 30 days' written notice, may redeem the Class A Warrants at a price of $.10 per Class A Warrant, provided that the closing sale price of the Common Stock as quoted on the principal market on which such shares shall then be trading shall be not less than 140% of the Market Price per share during any period of 30 consecutive trading days ending on the third day preceding the date of such notice; and further provided that the Class A Warrant holders may exercise their Class A Warrants at any time prior to the redemption date specified in such notice. 72 The Class A Warrants contain protections against dilution affecting both the exercise price of, and number of shares of Common Stock purchasable under, such warrants. Such protections shall become operative upon (a) any issuance of Common Stock, warrants or other securities convertible into Common Stock at a price below the then market value of the Common Stock during a period of five years from the date of this Prospectus; (b) any issuance of Common Stock, warrants or other securities convertible into Common Stock as a dividend; or (c) a subdivision or combination of the outstanding Common Stock, warrants or other securities convertible into Common Stock as the result of a merger, consolidation, spin-off or otherwise. The holders of the Class A Warrants have no right to vote on matters submitted to the shareholders of the Company and have no right to receive dividends. The holders of the Class A Warrants are not entitled to share in the assets of the Company in the event of liquidation, dissolution, or the winding up of the Company's affairs. The Class A Warrants issued pursuant to this Prospectus may not be exercised unless the Company maintains an effective registration statement covering the shares of Common Stock issuable upon exercise of the Class A Warrants with the SEC and the various securities administrators for the states in which the Class A Warrant holders reside, or unless issuance of such shares of Common Stock is exempt from registration. Although the Company will make every reasonable effort to maintain such registration, no assurances can be given that the Company will be successful in this regard. The Class A Warrants may not be exercised after , 1997 (nine months after the date of this Prospectus) unless and until a Post-Effective Amendment has been filed with the SEC and becomes effective. Although the Company has undertaken and intends to file and keep current a prospectus that will permit the purchase and sale of the Common Stock underlying the Class A Warrants, there can be no assurance that the Company will be able to do so. The Company's transfer agent, American Stock Transfer & Trust Company, as warrant agent, will be responsible for all record-keeping and administrative functions in connection with the Class A Warrants. A copy of the form of Class A Warrant Agreement is filed as an exhibit to the Registration Statement. The discussion of the Class A Warrants herein does not purport to be complete and is qualified in its entirety by reference to the Warrant Agreement. 73 IPO WARRANTS In connection with its IPO, the Company issued 690,000 redeemable warrants (the "IPO Warrants"), each of which entitles the holder thereof to purchase one share of Common Stock at an exercise price of $5.50 per share at any time during the four year period which commenced on August 13, 1996 and which will end on August 12, 2000. The IPO Warrants, were issued pursuant to a warrant agreement between the Company and American Stock Transfer & Trust Company, are in registered form and are saleable, assignable, and conveyable separately and apart from the Common Stock. Unless exercised, the IPO Warrants will automatically expire at 3:00 p.m., New York time on August 12, 2000. Commencing August 12, 1998 and continuing through August 12, 2000, the Company, at its option, upon thirty (30) days' written notice, may redeem the IPO Warrants at a price of $.05 per IPO Warrant, provided that the closing sale price of the Common Stock as quoted on the principal market on which such shares shall then be trading shall be not less than $7.50 per share during any period of twenty (20) consecutive trading days ending on the tenth day preceding the date of such notice; and further provided that the IPO Warrant holders may exercise their IPO Warrants at any time prior to the redemption date specified in such notice. Investors should be aware that closing prices do not necessarily reflect actual purchase or sale transactions. The holders of the IPO Warrants are protected against dilution of their interests represented by the number of shares of Common Stock underlying the IPO Warrants upon the occurrence of certain events, including share dividends, share splits, mergers, reclassification, and the sale by the Company of Common Stock below the then market price (other than employee benefits and stock option plans). The holders of the IPO Warrants have no right to vote on matters submitted to the shareholders of the Company and have no right to receive dividends. The holders of the IPO Warrants are not entitled to share in the assets of the Company in the event of liquidation, dissolution, or the winding up of the Company's affairs. OPTIONS ISSUED TO EXECUTIVES In April 1995, the Company issued a five year option to Mrs. Klein pursuant to her employment agreement to purchase 75,758 shares of Common Stock at an exercise price of $5.00 per share. In June, 1995, the Company issued five year options to each of Messrs. Goldberg and Housman to purchase 75,758 shares of Common Stock at an exercise price of $5.00 per share. In May 1996, the Company 74 issued a five year option to Mrs. Klein pursuant to her employment agreement to purchase 37,879 shares of Common Stock at an exercise price of $5.00 per share. The number of shares of Common Stock purchasable upon exercise of such options and the purchase price shall be subject to adjustment to protect the holder thereof against dilution in the event that the Company shall (i) pay a dividend in, or make a distribution of, shares of Common Stock on its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a lesser number of shares, or (iv) reorganize or consolidate with or merge into another corporation or transfer all or substantially all of its assets to another entity. The holders of such options shall not be entitled to exercise any voting rights or any other rights of a shareholder of the Company unless and until the holder exercises the option. In November 1996, the Board granted to each of Messrs. Goldberg and Housman, subject to the consummation of written employment agreements with each of them, and such approvals from the Company's shareholders as part of the consideration for their agreement to enter into such employment agreements, five year options to purchase 350,000 shares of Common Stock at an exercise price of $1.99 per share. Such options shall vest over a three year period, and shall be substantially identical to the form of option previously issued to them. REPRESENTATIVE'S WARRANTS Upon the completion of the Offering, the Company will sell to the Representative, individually and not as representative of the Underwriters, the Representative's Warrants for consideration of one mil ($.001) per Representative's Warrant, exercisable for 375,000 Units in the aggregate. Each Representative's Warrant shall (i) entitle the holder thereof to purchase one Unit at an exercise price equal to 120% of the public offering price per Unit offered by the Company hereby; (ii) be exercisable for a period of four years commencing one year after the date of this Prospectus; and (iii) contain appropriate anti-dilution provisions. Such anti-dilution provisions include protection against dilution in both price and percentage of the Company (to the extent permitted by the rules and regulations of the NASD) upon (a) any issuance of Common Stock, warrants or other securities convertible into Common Stock at a price below the then market value of the Common Stock during a period of five years from the date of this Prospectus; (b) any issuance of Common Stock, warrants or other securities convertible into Common Stock as a dividend; or (c) a subdivision or combination of the outstanding Common Stock, warrants or other securities convertible into Common Stock as the result of a merger, consolidation, spin-off or otherwise. During the four-year period commencing one year from the date of this Prospectus, the Company is required to use its best efforts to assist the holders of the 75 Representative's Warrants and the underlying securities in publicly selling such Representative's Warrants and the underlying securities, when and if requested by the Representative or the holders of a majority thereof. These best efforts include the preparation and filing of one or more registration statements during such four-year period at the demand of the holders of not less than a majority of the Representative's Warrants or underlying securities, and the maintenance of the effectiveness thereof for at least nine months, the first of which such filings is at the Company's sole cost and expense, including, without limitation, blue sky fees and expenses and the fees and expenses (not to exceed $25,000) of one counsel to the holders of the Representative's Warrants or underlying securities, but not including any underwriting or selling commissions, discounts or other charges of any broker-dealer acting on behalf of such holders. In addition, for the period from the first through the seventh anniversary of the date of this Prospectus, the Company is required to notify all holders of the Representative's Warrants and underlying securities of the Company's intention to undertake another public offering of the Company's securities (whether by the Company or by any security holder of the Company). If requested by any holder of Representative's Warrants, the Company is required to include in such public offering any Representative's Warrants and underlying securities of such requesting holder at the Company's sole cost and expense (other than any applicable underwriting discounts or commissions, but including, without limitation, the fees and disbursements of counsel for any holder of Representative's Warrants and blue sky fees and expenses) and maintain the effectiveness of any registration statement relating to such public offering for at least nine months after the date such registration statement is declared effective. The Representative's Warrants will not be transferable, saleable, assignable or hypothecatable for one year from the date of this Prospectus, except that they may be assigned in whole or in part during such year to any NASD member participating in the Offering or any officer or representative of the Representative or any such NASD member. For the life of the Representative's Warrants, the holders thereof have the opportunity to profit from a rise in the market price of the Common Stock without assuming the risk of ownership of the shares of Common Stock issuable upon the exercise of the Representative's Warrants (and the Class A Warrants issuable upon exercise thereof), with a resulting dilution in the interests of the Company's shareholders by reason of exercise of warrants at a time when the exercise price is less than the market price for the Common Stock. Further, the terms on which the Company could obtain additional capital during the life of the Representative's Warrants may be adversely affected. The holders of the Representative's Warrants may exercise their warrants at a time when the Company would in all likelihood, be able to obtain any needed capital on terms more favorable than those provided for by the Representative's Warrants. 76 IPO UNDERWRITER'S WARRANTS In connection with its IPO, the Company issued to National Securities Corporation, the underwriter of the IPO, underwriter's warrants (the "IPO Underwriter's Warrants") to purchase from the Company up to 60,000 shares of Common Stock at an exercise price of $6.00 per share and 60,000 IPO Warrants at an exercise price equal to $.12 per Warrant. The IPO Underwriter's Warrants are exercisable during the four year period which will commence on August 12, 1997, and are not transferable, except to either a partner or an officer of the IPO Underwriter or by will or by operation of law. UMB OPTION In connection with the extension of the Company's warehousing line of credit with UMB from $2,500,000 to $4,000,000 which became effective in February, 1996, the Company granted to UMB a five year option to purchase up to 41,271 shares of Common Stock at an exercise price of $5.50 per share. Such option shall vest at the rate of 25% of the aggregate amount of such shares on August 16 of each year commencing in 1997 and continuing through 2000, and shall expire as to any unexercised portion thereof if, at any time during the term of the option, said line of credit is terminated, canceled or not renewed for any reason. The number of shares of Common Stock purchasable upon exercise of the option and the purchase price shall be subject to adjustment to protect the holder thereof against dilution in the event that the Company shall (i) pay a dividend in, or make a distribution of, shares of Common Stock on its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a lesser number of shares, or (iv) reorganize or consolidate with or merge into another corporation or transfer all or substantially all of its assets to another entity. UMB shall not be entitled to exercise any voting rights or any other rights of a shareholder of the Company unless and until the holder exercises the option. REGISTRATION RIGHTS The Representative's Warrants confer certain registration rights upon the holders thereof. See "-- Representative's Warrants." The IPO Underwriter's Warrants accord to the holders thereof rights to register the Common Stock and IPO Warrants underlying the IPO Underwriter's 77 Warrants under the Securities Act. The warrants issuable upon exercise of the Underwriter's Warrants are identical in all respects to the IPO Warrants. The options granted to Arthur H. Goldberg, Elie Housman, Glenda Klein and UMB accord "piggyback" registration rights to the holders thereof which obligate the Company, during a period of five years from the dates of issuance of such options, to include, upon request of the holders thereof, the shares of Common Stock underlying such options in any registration of capital stock under the Securities Act which the Company may undertake (other than (a) in an offering in which the underwriter thereof may object to such registration; (b) in a merger; or (c) pursuant to SEC Form S-8). These registration rights could result in substantial future expense to the Company and could adversely affect the Company's ability to complete future equity or debt financings. Furthermore, the registration and sale of securities of the Company held by or issuable to the holders of registration rights, or even the potential of such sales, could have an adverse effect on the market price of the securities offered hereby. NASDAQ SMALLCAP MARKET LISTING; BOSTON STOCK EXCHANGE AND PACIFIC STOCK EXCHANGE LISTING APPLICATIONS The Company's Common Stock and the warrants issued in connection with its IPO are listed for trading in the Nasdaq SmallCap Market under the symbols PCFC and PCFCW. The Company has applied for additional listing of the Common Stock which are components of the Units being offered hereby, and has applied for inclusion of the Units and the Class A Warrants in the Nasdaq SmallCap Market . It has also applied for listing of the Units, Common Stock and Class A Warrants on the Boston Stock Exchange and the Pacific Stock Exchange. It is anticipated that the Units and Class A Warrants will trade on the Nasdaq SmallCap Market under the symbols PCFCU and PCFC[A], upon official notice of issuance. It is also anticipated that the Units, Common Stock and Class A Warrants will trade on the Boston Stock Exchange and the Pacific Stock Exchange under the symbols, [ ], [ ] and [ ], and [ ], [ ] and [ ], respectively, upon official notice of issuance.No assurance can be given that the Company's application for listing of the Units and/or Class e.No A Warrants on the Nasdaq SmallCap Market, or its applications for listing of the Units, Common Stock and/or Class A Warrants on the Boston Stock Exchange and/or the Pacific Stock Exchange will be granted. Recently, a proposal has been made to increase the continued listing criteria on the Nasdaq SmallCap Market. If implemented as proposed, stricter criteria for continued listing on the Nasdaq SmallCap Market would be imposed, including the implementation of a $2,000,000 net tangible assets test, requirements for a greater number of publicly held securities and a higher market value for such securities and the implementation of new corporate governance criteria. No assurance can be given that such proposal will be 78 adopted, or, if adopted, will be adopted in its current form. TRANSFER AGENT, WARRANT AGENT AND REGISTRAR American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, serves as the transfer agent and registrar of the Common Stock, and as warrant agent of the Class A Warrants. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding [ ] shares of Common Stock ([ ] shares if the Underwriters' over-allotment option is exercised in full). Of these shares, [ ] shares will be freely tradeable without restriction under the Securities Act. The remaining [ ] shares of Common Stock held by existing shareholders are restricted securities within the meaning of Rule 144. Subject to compliance with the provisions of Rule 144, said shares presently are eligible for sale to the public, notwithstanding the fact that such shares have not been registered under the Securities Act. In general, under Rule 144 as currently in effect, an affiliate of the Company, or a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years but less than three years, will be entitled to sell in any three month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 51,922 shares immediately after the Offering) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Rule 144A under the Act as currently in effect permits the immediate sale of restricted shares to certain qualified institutional buyers without regard to volume restrictions. The Commission has proposed an amendment to Rule 144 which, if adopted, would reduce the above mentioned two year and three year holding periods to one year and two years, respectively. Pursuant to certain restrictions upon sale imposed by a "lockup" agreement which each of such existing shareholders executed and delivered to the underwriter of the IPO as a condition to the closing of that offering, none of said 802,272 shares will be eligible for sale in the public market until August 15, 1997, provided that, after May 15, 1997, each of the holders of such shares may sell up to 79 10% of his, her or its shares pursuant to Rule 144. In addition to the foregoing lockup restrictions, the Representative has required, as a condition to the closing of the Offering, that each of the Company's directors, officers, key employees and holders of 2% or more of the Common Stock must execute written lockup agreements providing that, for a period of 12 months from the date of this Prospectus, they shall not offer, register, sell, contract to sell, grant an option for the sale of, issue, assign, transfer or otherwise dispose of any of the Company's securities held by them without the Representative's prior written consent. The lockup agreements will have no effect on the date on which shares become eligible for sale pursuant to Rule 144. There has been no prior market for the Units or the Class A Warrants, and there can be no assurance a significant public market for such securities will develop or be sustained after the offering. Sales of substantial amounts of Units, Common Stock or Class A Warrants in the public market could adversely affect the market prices of the Company's securities. UNDERWRITING The underwriters named below, for whom LT Lawrence & Co., Inc. is acting as the Representative (the "Underwriters"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of Units set forth opposite each Underwriter's name below:
NUMBER UNDERWRITERS OF UNITS ------------ -------- LT Lawrence & Co., Inc................................. --------- Total 3,750,000 --------- ---------
The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the Units offered hereby through the Representative, if any are purchased. The Company has been advised by the Representative that, the Underwriters propose initially to offer the Units to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow a concession of not more than $. per Unit to selected dealers; and the Underwriters may allow, and such dealers may reallow, a concession of not more than $. per Unit to certain other dealers. After the consummation of the Offering, the concession to selected dealers and the reallowance to other dealers may be changed by the Underwriters. The Units are offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. 80 The Company has granted to the Underwriters an option to purchase up to 562,500 additional Units solely to cover over-allotments, if any. The option is exercisable within 45 days from the date of this Prospectus at the price to public, less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent the Underwriters exercise the option, the Underwriters will be committed, subject to certain conditions, to purchase the additional Units. See "Shares Eligible For Future Sale" for a description of certain lock-up agreements. The Company has agreed to indemnify the Underwriters against, or contribute to the losses arising from, certain liabilities, including liabilities arising under the Securities Act. The Company has paid the Representative $50,000 on account of the Underwriters' expenses in connection with the Offering to be applied to a non-accountable expense allowance equal to 3% of the aggregate offering price of the Units to be sold in the Offering. The Company has agreed to sell to the Representative, for an aggregate of $375, Representative's Warrants to purchase 375,000 Units, at an exercise price per Unit equal to 120% of the public offering price set forth on the cover page of this Prospectus. The Representative's Warrants will be exercisable for a period of four years, commencing one year from the date of this Prospectus, and will contain anti-dilution provisions providing for appropriate adjustment of the exercise price and number of Units that may be purchased upon the occurrence of certain events. The Representative's Warrants may not be sold, transferred or pledged until one year from the date of this Prospectus, except that they may be transferred, in whole or in part, at any time to, among others, any officer, director or stockholder of the Representative or successors to the Representative. Holders of the Representative's Warrants have demand and piggyback registration rights with respect to the Representative's Warrants and the underlying securities. See "Description of Securities -- Registration Rights." The Representative was organized in February 1992 and was registered as a broker-dealer in 1994. Prior to this Offering, the Representative has participated as a sole or co-manager in four public offerings. See "Risk Factors--Lack of Underwriting History." The Representative has informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Representative has agreed to pay a finder's fee of approximately $30,000 to Andrew Racz, who is unaffiliated with the Company or the Representative. 81 The Company has agreed that, during the five year period commencing on the date of closing of the Offering, the Representative shall have the right to appoint two members of the Company's Board of Directors, and to designate one person to attend all meetings of the Company's Board of Directors. The Representative has advised the Company that, as of the date of this Prospectus, the Representative has not made any determination as to whether, and if so, when, it may exercise its right to appoint any director. Upon the exercise of any Class A Warrants, which exercise was solicited by the Representative, and to the extent not inconsistent with the guidelines of the NASD and the Rules and Regulations of the Commission, the Company has agreed to pay the Representative a commission which shall not exceed 5% of the aggregate exercise price of such Class A Warrants in connection with bona fide services provided by the Representative relating to any Class A Warrant solicitation. In addition, the individual must state in writing (either within or accompanying the warrant exercise notice) whether the exercise of the individual's warrants was solicited by the Representative in order for the Representative to be entitled to such Class A Warrant solicitation fee. Pursuant to the Warrant Agreement, the warrant agent will monitor the warrant exercise notices to determine whether a Class A Warrant holder's exercise was solicited by the Representative. However, no compensation will be paid to the Representative in connection with the exercise of the Class A Warrants if (a) the market price of the Common Stock is lower than the exercise price; (b) the Class A Warrants were held in a discretionary account; or (c) the Class A Warrants are exercised in an unsolicited transaction. The Company has agreed not to solicit the exercise of any Class A Warrants other than through the Representative unless the Representative is legally unable to solicit such exercise, in which event the Company may solicit such exercise, either by itself or with the assistance of a third party. The Underwriters and certain selling group members that currently act as market makers for the Common Stock may engage in "passive market making" in the Company's securities on the Nasdaq SmallCap Market in accordance with Rule 10b-6A under the Exchange Act ("Rule 10b-6A"). Rule 10b-6A permits, upon satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed to engage in limited market making activities during the period when Rule 10b-6A would otherwise prohibit such activity. In general, under Rule 10b-6A, any underwriter or selling group member engaged in passive market making activities in the Company's securities (i) may not effect transactions in, or display bids for, such securities at a price that exceeds the highest bid for such securities displayed on Nasdaq by a market maker that is not participating in the distribution of such securities, (ii) may not have net daily purchases of such Company securities during the later of nine business days before the commencement of offers or sales of the securities to be distributed or the time such person becomes a participant in the distribution that exceed 30% of the average daily trading volume in such securities for the two full consecutive calendar months 82 immediately preceding the filing date of the Registration Statement of which this Prospectus is a part and (iii) must identify its bids as made by a passive market maker. The foregoing is a summary of the principal terms of the Underwriting Agreement and does not purport to be complete. Reference is made to the forms of Underwriting Agreement and Representative's Warrant Agreement, copies of which are on file as exhibits to the Company's Registration Statement of which this Prospectus forms a part. See "Additional Information." LEGAL MATTERS The validity of the Units, Common Stock and Class A Warrants being offered hereby will be passed upon for the Company by Hall Dickler Kent Friedman & Wood, LLP. Certain legal matters in connection with the Units, Common Stock and Class A Warrants offered hereby will be passed upon for the Representative by Rubin Baum Levin Constant & Friedman. EXPERTS The financial statements of Pioneer Commercial Funding Corp. for the years ended March 31, 1995 and 1996 included in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. AVAILABLE INFORMATION The Company has filed a registration statement on Form SB-2 (the "Registration Statement") under the Securities Act which includes this Prospectus. This Prospectus, which constitutes a part of the Registration Statement does not contain all the information set forth in the Registration Statement and exhibits thereto. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and the exhibits thereto. All of these documents may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington D.C. 20549; and at the SEC's Regional Office at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies may be obtained at the prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other 83 document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company is subject to the informational requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith electronically files reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.; and 7 World Trade Center, Suite 1300, New York, New York; and copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. at prescribed rates. In addition thereto, such reports, proxy and information statements and other information may be accessed and retrieved from the Website maintained by the Commission at http://www.sec.gov. The Common Stock is listed on the Nasdaq SmallCap Market. The Company has applied for listing of the Units and Class A Warrants on said Market. The Company has also applied for listing of the Units, Common Stock and Class A Warrants on the Boston Stock Exchange and the Pacific Stock Exchange. Copies of the reports, proxy and information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. 84 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants............................. F-1 Balance Sheet as of March 31, 1996................................... F-2 Statements of Operations for the years ended March 31, 1995 and 1996.................................. F-3 Statements of Changes in Shareholders' Equity for the years ended March 31, 1995 and 1996....................................................... F-4 Statements of Cash Flows for the years ended March 31, 1995 and 1996.................................. F-5 Notes to Financial Statements March 31, 1995 and 1996............................................. F-6 Balance Sheet as of September 30, 1996 (Unaudited)................... F-19 Statements of Operations for the Three and Six Month Periods ended September 30, 1996 and 1995 (Unaudited)................ F-21 Statement of Changes in Shareholders' Equity for the Six Month Period ended September 30, 1996 (unaudited)............ F-21 Statements of Cash Flows for the Six Months ended September 30, 1996 and 1995 (Unaudited)........................ F-22 Notes to Unaudited Financial Statements.............................. F-23
85 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Pioneer Commercial Funding Corp.: We have audited the accompanying balance sheet of Pioneer Commercial Funding Corp. (a New York corporation) as of March 31, 1996, and the related statements of operations, changes in stockholders' equity and cash flows for the years ended March 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Commercial Funding Corp. as of March 31, 1996, and the results of its operations and its cash flows for the years ended March 31, 1995 and 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As further discussed in Note 1 to the financial statements, the Company has incurred substantial losses for the period since its emergence from bankruptcy in April 1993 through March 31, 1996 which has resulted in the deterioration of the Company's financial condition. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that may result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP New York, New York July 1, 1996 F-1 PIONEER COMMERCIAL FUNDING CORP. BALANCE SHEET MARCH 31, 1996 ASSETS ------ CASH AND TEMPORARY CASH INVESTMENTS $ 98,349 LOANS RECEIVABLE, MORTGAGE WAREHOUSE 3,512,775 ACCRUED INTEREST AND FEES RECEIVABLE 30,007 DEFERRED COSTS OF EQUITY OFFERING 445,731 FIXED ASSETS: Furniture and equipment 50,370 Proprietary computer software 469,655 ----------- 520,025 Less- Accumulated depreciation and amortization 302,035 ----------- Net fixed assets 217,990 ----------- OTHER ASSETS 26,087 ----------- Total assets $ 4,330,939 =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES: Loans payable, mortgage warehouse $ 3,254,235 Revolving lines of credit 79,400 Bridge financing (notes totaling $100,000 less unamortized discount of $37,500) 62,500 Accrued interest payable 43,564 Due to mortgage banking companies 20,917 Accounts payable and accrued expenses 261,163 Deferred legal fees 76,743 ----------- Total liabilities 3,798,522 ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock - $.01 par value; authorized 5,000,000 shares; 835,000 shares issued and outstanding 8,350 Additional paid-in capital 8,598,634 Accumulated deficit (8,074,567) ----------- Total stockholders' equity 532,417 ----------- Total liabilities and stockholders' equity $ 4,330,939 ===========
The accompanying notes are an integral part of this balance sheet. F-2 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
1995 1996 ---- ---- INCOME: Interest income $ 99,453 $ 76,957 Commissions and fees 7,500 4,500 Processing fees 65,073 15,733 ---------- ---------- Total income 172,026 97,190 ---------- ---------- DIRECT COSTS: Interest expense, warehouse loan and revolving line of credit 58,117 81,104 Interest expense, bridge financing 142,748 79,231 Bank charges and fees 7,645 9,711 Bank processing fees 2,790 4,593 ---------- ---------- Total direct costs 211,300 174,639 ---------- ---------- LOSS BEFORE OPERATING EXPENSES (39,274) (77,449) OPERATING EXPENSES 544,462 433,709 ---------- ---------- Loss from operations (583,736) (511,158) ---------- ---------- OTHER INCOME (EXPENSE): Loss on retirement of assets, net of gains on sales (4,279) - Interest income -- other 5,021 12,685 Interest expense -- other (4,712) (4,712) Other income - 24,570 ---------- ---------- Total other income (expense), net (3,970) 32,543 ---------- ---------- LOSS BEFORE INCOME TAXES (587,706) (478,615) PROVISION FOR INCOME TAXES 1,449 1,188 ---------- ---------- Net loss $ (589,155) $ (479,803) ========== ========== LOSS PER SHARE OF COMMON STOCK $ (.78) $ (.58) WEIGHTED AVERAGE NUMBER OF SHARES 753,053 826,644
The accompanying notes are an integral part of these statements. F-3 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
Additional Total Common Paid-in Subscriptions Deferred Accumulated Stockholders' Stock Capital Receivable Compensation Deficit Equity ----------- ----------- ----------- ----------- ----------- ----------- BALANCES, March 31, 1994 $ 6,595 $ 7,915,139 $ (153,170) $ (160,750) $(7,000,655) $ 607,159 Issuance of 45,033 shares of Class A preferred stock of Pioneer equivalent to 45,033 shares of common stock of the Company (postmerger) 451 199,549 -- -- -- 200,000 Issuance of 176,136 shares of Class B common stock of Pioneer equivalent to 176,136 shares of common stock of the Company (postmerger) 1,761 498,239 -- -- -- 500,000 Payment of subscriptions -- -- 153,170 -- -- 153,170 Amortization of deferred compensation for consulting services -- -- -- 96,000 -- 96,000 Dividends paid on preferred stock of Pioneer prior to the merger -- -- -- -- (4,954) (4,954) Cancellation of contract for consulting services effective September 30, 1994 and return and cancellation of related 55,682 common shares (557) (64,193) -- 64,750 -- -- Net loss for the period -- -- -- -- (589,155) (589,155) ----------- ----------- ----------- ----------- ----------- ----------- BALANCES, March 31, 1995 8,250 8,548,734 -- -- (7,594,764) 962,220 Issuance of 10,000 shares of the Company's common stock in connection with the bridge financing 100 49,900 -- -- -- 50,000 Net loss for the period -- -- -- -- (479,803) (479,803) ----------- ----------- ----------- ----------- ----------- ----------- BALANCES, March 31, 1996 $ 8,350 $ 8,598,634 $ -- $ -- $(8,074,567) $ 532,417 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
1995 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (589,155) $ (479,803) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 232,965 164,080 Expenses for consulting services paid for in stock 96,000 - Net loss on dispositions of assets 4,279 - (Increase) decrease in- Accrued interest receivable 7,608 (10,866) Other assets (2,661) (6,654) Increase (decrease) in- Accrued interest payable 33,710 (1,543) Due to mortgage banking companies (69,663) (15,054) Due to creditors - - Accounts payable trade and accrued expenses 93,013 96,921 ----------- ----------- Total adjustments 395,251 226,884 ----------- ----------- Net cash used in operating activities (193,904) (252,919) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in mortgage warehouse loans receivable 1,604,828 (2,579,116) Proceeds from sale of fixed assets - - Purchase of fixed assets (9,850) (4,805) ----------- ----------- Net cash provided by (used in) investing activities 1,594,978 (2,583,921) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in borrowings used in operations, net of issuance costs (1,471,683) 2,680,185 Payment of dividends on preferred stock (4,954) - Increase in deferred costs of equity offering (245,690) (182,570) Proceeds from stock transactions 653,170 - ----------- ---------- Net cash provided by (used in) financing activities (1,069,157) 2,497,615 ----------- ----------- Net increase (decrease) in cash and temporary cash investments 331,917 (339,225) CASH AND TEMPORARY CASH INVESTMENTS, beginning of year 105,657 437,574 ----------- ----------- CASH AND TEMPORARY CASH INVESTMENTS, end of year $ 437,574 $ 98,349 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 29,119 $ 65,620 =========== ===========
The accompanying notes are an integral part of these statements. F-5 PIONEER COMMERCIAL FUNDING CORP. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 AND 1996 1. ORGANIZATION AND MERGER, PIONEER'S REORGANIZATION AND OPERATIONS Organization and Merger PCF Acquisition Corp. ("PCF") was organized and commenced operations on March 8, 1994. The initial 185,511 shares of PCF's common stock were issued at a price of $.81 per share on March 9, 1994 to the two founding stockholders. Such shares were paid for on July 1, 1994. PCF was organized for the express purpose of raising capital through an initial public offering ("IPO") for the benefit of Pioneer Commercial Funding Corp. ("Pioneer"), a mortgage warehouse lender that emerged from Chapter 11 Bankruptcy on April 2, 1993. Pioneer is related to PCF through common interests. On November 23, 1994, in contemplation of the IPO and in accordance with a resolution ratified by the Board of Directors of PCF and Pioneer, Pioneer merged with and into PCF in a one-for-one exchange of all of the outstanding shares of the Class A and Class B common stock and the Class A preferred stock of Pioneer for common shares of PCF. Immediately subsequent to the merger, PCF changed its name to Pioneer Commercial Funding Corp. (hereafter referred to as the "Company"). The merger has been accounted for as an exchange between companies under common control and the assets and liabilities of the merged entity are recorded at their historical cost. All amounts presented have been restated to give effect to the merger as if it had occurred on the first day of each period presented. Pioneer's Reorganization On April 2, 1993 (the "Effective Date"), Pioneer emerged from Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the "Bankruptcy Code") pursuant to a confirmed First Amended Modified Plan of Reorganization ("POR"). These financial statements have been prepared starting on the day after Pioneer's emergence from bankruptcy. The POR confirmed by the Bankruptcy Court provided for the following: - Substantially all of Pioneer's assets (which were primarily loans and accrued interest receivable) were remitted to the secured creditors in settlement of Pioneer's outstanding obligations. - All other recoverable assets have been placed in a distribution fund. Liquidation of these assets are first to be used to pay administrative expense obligations (estimated to be F-6 approximately $1.9 million) with any residual funds to be distributed to the unsecured creditors on a pro rata basis. - As further discussed in Note 12, unsecured creditors also received noninterest-bearing notes totaling $1,350,000 which are to be paid only upon Pioneer attaining certain pre-defined income levels in future periods. - Subsequent to the confirmation date, Pioneer paid the unsecured creditors $252,000 ($102,000 from cash on hand as of the confirmation date and $150,000 from proceeds of Pioneer's issuance of preferred stock subsequent to the confirmation date). Such payment was distributed to the unsecured creditors on a pro rata basis. - Pioneer received $131,000 from the creditors' trust fund after the confirmation for working capital purposes. - After the confirmation date, Pioneer was reimbursed $50,000 from a certain law firm which provided services to Pioneer during the reorganization period. Such amount will be repaid to the law firm only after the $1,350,000 notes to the unsecured creditors discussed above are paid in full. As discussed above, Pioneer remitted its loans and other receivables to the secured and unsecured creditors in satisfaction of its debt obligations. Collection and recovery of these outstanding receivables were the responsibility of the creditors committee, therefore, Pioneer is unable to determine the overall recovery by the secured and unsecured creditors groups of their claims against Pioneer. Claims for administrative expenses have been fully recovered by the creditors. Operations The Company is engaged in the business of mortgage warehouse lending which primarily consists of providing lines of credit, in the form of "warehouse financing," to mortgage banking companies to enable them to close real estate loans on single family, owner-occupied dwellings and sell such loans to investors in the secondary market. The Company obtains its funds to provide such financing from third-party funding sources with which it has available lines of credit. The Company's loans receivable from the mortgage banking company are secured by an interest in the underlying real property which are then assigned to the Company's funding sources. Investor groups who purchase the mortgages (which generally occurs within two weeks from the time the Company makes the loan) remit the proceeds directly to the Company in satisfaction of the loan and interest receivable from the mortgage banking company. The Company will simultaneously use the funds to pay off its loan and accrued interest payable to its funding sources. The Company's primary sources of income from operations are processing fees received from the mortgage banking company for each loan financed and the interest rate spread (usually 0.5%) between the rate at which the Company borrows from its funding source and the rate it charges the mortgage banking company. The Company's operations are subject to certain risks which are inherent to its industry. Its results of operations depend heavily upon the ability of its mortgage banking customers to originate mortgage loans. This ability is largely dependent upon general economic conditions in the geographic areas that the Company serves. Because these general economic conditions fluctuate, there can be no assurance that prevailing economic conditions will always favor the Company's business and operations. In addition, mortgage banking firms have historically experienced a wide range of financial results, from highly profitable to highly unprofitable. These financial F-7 results are due to many factors which affect most, if not all, firms in the mortgage banking business at about the same time. Three of these factors which predominate are: changes in mortgage interest rates, the availability of affordable credit, and the state of the domestic economy. These three factors, among others, affect the demand for new and used housing and thus the demand for financing and refinancing of mortgages. Lastly, although the Company's mortgage banking customers must have a commitment for each loan from an approved third-party agency ("Agency") before the Company will extend mortgage warehouse financing, there is no guarantee that the Agency will, in fact, accept the mortgage loan when delivered due to certain deficiencies in the loan or other unanticipated circumstances which may exist. If for any reason an Agency does not accept the mortgage loan, and the Company's mortgage banking customer is unable to pay back its obligation to the Company through other means, the Company could find itself the owner of a long-term loan of less than market value instead of short-term bridge financing receivable. As of June 14, 1993, when the Company began its first active operations since its emergence from Chapter 11, the Company had an available line of credit of $1.0 million from one source which was subsequently increased to available lines of credit from two funding sources in the total amount of $2.35 million as of March 31, 1995 and $4.1 million as of May 1996. Substantially all of the business conducted by the Company during the period from April 3, 1993 to March 31, 1994 and for the year ended March 31, 1995 was with one active mortgage banking company who had a credit line approved by the Company in the amount of $2.0 million. In April, 1995, the Company discontinued the credit line with this customer as a result of the customer not complying with all of the terms of the credit line agreement. The Company had substantially no mortgage lending activities from April 1995 through August 1995. During the period from August 1995 through November 1995, the Company developed customer relationships with three new mortgage banking companies. For the period from August 1, 1995 through May 30, 1996, the Company generated approximately $31.6 million in mortgage warehouse lending volume from these three new customers. The Company is in the process of evaluating the creditworthiness of several other potential customers. Although the Company expects to conduct business in the future with a greater number of mortgage banking customers, and thereby reduce the risks attendant in relying upon a small number of sources to support its business, no assurance can be given that it will receive applications from potential customers who will be able to satisfy its standards, or if it does receive such applications, that such applicants will thereafter engage in the volume of mortgage warehouse lending transactions that are required to sustain the Company's operations. The cessation of business of any of the Company's active customers or the inability of its customers to provide the Company with an increased level of loan volume could materially adversely affect the Company's ability to generate sufficient revenues to operate profitably and to continue to meet its cash obligations in future periods. During the period from April 3, 1993 to March 31, 1994 and the years ended March 31, 1995 and 1996, the Company incurred net losses of $399,000, $589,000 and $480,000, respectively. Such losses were partly attributable to noncash expenses (primarily depreciation, amortization, debt discount expenses and deferred consulting agreement expenses) totaling $130,000, $329,000 and $164,000 during 1994, 1995 and 1996, respectively, and the inability of the Company to generate a sufficient volume of loan transactions with its customers. These matters have resulted in the deterioration of the Company's financial condition and raise substantial doubt about its ability to continue as a going concern. These financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. In order for the Company to strengthen its financial condition and to operate profitably in future periods, it will need to continue to increase its capacity to fund loan transactions and correspondingly increase loan originations. Such increases F-8 are dependent upon the Company's ability to (1) increase funds available from financing sources, and (2) develop new customer relationships with mortgage banking companies which will supply the Company with a sufficient volume of loan transactions. As discussed above, the Company is actively pursuing new relationships with mortgage banking companies and believes that they will be able to significantly increase loan volume demand in future periods. The Company's ability to attract and retain new funding sources or to increase available financing from its existing sources is contingent upon the Company's ability to raise additional capital. The Company is currently exploring several opportunities to raise additional capital including its current intent to issue common stock in an IPO transaction. Management anticipates that the terms of the IPO shall consist of an offer to sell, in tandem, 690,000 shares of common stock of the Company and 690,000 common stock purchase warrants (of which the underwriter has the option to purchase up to 90,000 of such shares of common stock and warrants in the event of an over-allotment) at a per unit price of $5.00 and $0.10, respectively, and 40,000 shares of the existing issued and outstanding common stock of the Company (currently owned by the bridge financers as discussed in Note 5) at a price per share of $5.00 (proceeds from the sale of these shares will not revert back to the Company). The warrants will give the owner the right to purchase an additional share of common stock at a price of $5.50 for a period of four years commencing one year after the completion of the IPO (the "Exercise Period"). Such warrants will be immediately tradable separate from the common stock. Commencing two years after the completion of the IPO and through the end of the exercise period, the warrants may be redeemed by the Company upon 30 days' written notice at a price of $.05 per warrant, provided that (1) the closing sale price of the Company's common stock shall not be less than $7.50 per share for any period 20 days subsequent to the issuance of the written notice, or (2) that the warrant holders have not exercised their warrants at any time prior to the period 30 days after the issuance of the written notice. In addition, the underwriter will be issued the right for a period of four years commencing one year after the completion of the IPO to purchase, in tandem, 60,000 shares of common stock of the Company and 60,000 common stock purchase warrants at a price of $6.12 for each combined share and warrant. The terms of the warrants acquired by the managing underwriter would be the same as those discussed above except that such options are nontransferable. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The accompanying financial statements, which are prepared in conformity with generally accepted accounting principles, require the use of estimates made by management. The most significant estimates with regard to these financial statements relate to the valuation allowance for deferred income taxes and the estimated obligations due under the plan of reorganization, as more fully described in Notes 6 and 12. Actual results may differ from those assumed in management's estimates. Cash and Temporary Cash Investments Temporary cash investments include all liquid interest-bearing investments with original maturities of three months or less. Effective April 25, 1996, a certificate of deposit in the amount of $25,000 was pledged in order for the Company to receive the right to conduct business in the State of California. F-9 Fixed Assets Depreciation expense is computed generally on a straight-line basis. Leasehold improvements are amortized over the life of the asset or the term of the lease, whichever is shorter. The ranges of estimated useful lives used in computing depreciation and amortization are as follows:
Years ------ Furniture and equipment 3 to 10 Autos and trucks 5 Leasehold improvements 3 to 10 Proprietary computer software 5
Proprietary computer software consists of a set of computer programs that were developed internally by the Company for use in its business and are not for resale to other mortgage finance companies. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are provided for at the statutory rates on the difference between financial statement basis and tax basis of assets and liabilities and are classified in the balance sheets as current or noncurrent consistent with the assets and liabilities which give rise to such deferred income taxes. Deferred Costs of Equity Offering and Debt Issuance Certain costs associated with the IPO have been paid by the Company and are deferred on the balance sheets. Upon the successful completion of the IPO, these costs will be shown as a direct reduction to additional paid-in capital. However, should the IPO not be consummated, such deferred costs will be immediately written off by the Company in its statements of operations. In addition, costs incurred in connection with the issuance of debt have been deferred and are being amortized over the term of the debt instrument. Loss Per Share of Common Stock The loss per share of common stock was computed using the net loss for the year, divided by the weighted average number of shares outstanding during such year (adjusted for the reverse stock split effective in August 1994 and June 1996). Weighted average shares outstanding are further adjusted for the impact of shares issued and options granted for which the share price/option exercise price is less than the anticipated IPO per share offering price of $5.00. Prospective Changes in Accounting Policies The following new financial accounting standards must be adopted by the Company effective April 1, 1996: - SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of," requires that, if certain changes in events or circumstances occur which indicate that the carrying amount of a long-lived asset may not be recoverable, a company must evaluate whether the asset is impaired, as defined. If an asset is considered F-10 to be impaired, a valuation allowance must be established equal to the difference between the carrying value of the asset and the estimated discounted value of the asset based on certain realization assumptions. - SFAS No. 123, "Accounting for Stock-Based Compensation," establishes financial accounting and reporting standards for stock-based employee compensation plans and will allow companies to choose either (1) a fair value method of valuing stock-based compensation plans which will affect reported net income, or (2) to continue following the existing accounting rules for stock option accounting but disclose what the impact would have been had the new standard been adopted. The Company will choose the disclosure option of this standard which would require disclosing the pro forma net income and earnings per share amounts assuming the fair value method was adopted on April 1, 1995. Management believes that the adoption of these new accounting standards on April 1, 1996 will not have a material impact on the Company's financial condition or results of operations. 3. MORTGAGE WAREHOUSE LOANS RECEIVABLE/PAYABLE Loans receivable are generally due within thirty to forty-five days from the date funded, with an average outstanding period of twelve days and interest payable at prime plus 1.5%. Similarly, all of the loans payable are due within the same time frame with interest payable at prime plus 1%. The Company's line of credit with its loan payable funding source is limited to $4.1 million (as a result of an increase from $2.0 million in February 1996) and matures on August 31, 1996. In consideration for this increase, the Company paid a financing fee of $7,900 and has agreed to issue to the funding source upon the closing of the IPO, a five year option to purchase up to 41,271 shares of the Company's common stock at an exercise price of $5.50 per share. These options vest at a rate of 10,318 shares per year on the first through fourth anniversaries of the IPO closing date. If the credit line is terminated, any unexercised warrants will immediately expire. For the years ended March 31, 1995 and 1996, the weighted average interest rate on loans receivable was 8.84% and 9.93%, respectively, and on loans payable was 7.01% and 9.53%, respectively. Loans receivable are collateralized by a security interest in the underlying real property which the Company then assigns to its funding sources as security for the loans payable. The Company is required to comply with certain operating covenants in accordance with the debt agreement with its funding source. As of March 31, 1996, the Company was in compliance with these covenants. 4. REVOLVING LINES OF CREDIT As of March 31, 1995, the Company had a Revolving Line of Credit ("LOC") from a related party in the amount of $350,000. Such LOC had a maturity date of November 15, 1995 and was not renewed when it matured. As of March 31, 1995 and through November 15, 1995, no amounts were outstanding under this LOC. In November 1995, the Company entered into revolving credit agreements with certain officers, directors and former officers of the Company to borrow an aggregate of $113,000 at an interest rate of prime plus 1/4 percent. These agreements mature in December 1996. As of March 31, 1996, $79,400 was outstanding under these LOCs. F-11 Borrowings on all of the LOCs described above are secured by an assignment of the general security interest in the mortgage notes underlying the mortgage warehouse loans receivable. 5. BRIDGE FINANCING In March 1994, the Company entered into a loan arrangement with various individuals (original bridge financers) to provide $200,000 in additional funds to be used in the ordinary course of the Company's warehouse lending operations and to defray certain expenses of the anticipated IPO. The loans bore interest at a rate of 12% and were due at the earlier of the successful completion of the IPO or August 31, 1995. As an inducement to make these loans, the Company issued 22,727 shares of its common stock to the original bridge financers. The original 22,727 shares issued and the additional 7,273 shares issued discussed below were assigned a $5.00 per share value (which is equal to the price that these shares will be offered at in the IPO) resulting in a $150,000 discount to the debt. Such discount was being amortized to interest expense over the term of the debt agreements resulting in an effective interest rate of 248%. On August 31, 1995, the bridge loans matured but were not paid by the Company. On January 16, 1996, the Company paid off in full loans outstanding to two of the bridge financers with an aggregate unpaid balance as of such date totaling $122,492 (which includes $22,492 of unpaid accrued interest). On February 1, 1996, the Company entered into agreements with the remaining two bridge financers (the remaining bridge financers) with aggregate outstanding loans to the Company as of such date totaling $123,708 (which includes $23,708 of unpaid accrued interest), whereby the maturity date of the bridge loan obligations was extended to the earlier of three days following the consummation of the IPO or December 31, 1996. The Company received waivers from all of the original bridge financers for any defaults which may have occurred as a result of the Company's failure to pay off its debt obligations on their original maturity date of August 31, 1995. In consideration for the waivers received and in order to adjust the number of shares given to the original bridge financers for the impact of the June reverse stock split which reduced their number of shares owned from 30,000 to 22,727 shares, the Company issued to the original bridge financers an additional 7,273 shares of common stock in June 1996. In addition, the Company issued 10,000 more post-split shares to the remaining bridge financers in consideration for extending the maturity on their debt in February 1996. A value of $5.00 per share was assigned to these shares on the date of the debt modification resulting in a $50,000 discount to the debt. Such discount is being amortized to interest expense over the remaining term of the modified debt agreements resulting in an effective interest rate of 133% for the period from February 1, 1996 through December 31, 1996. 6. INCOME TAXES For the years ended March 31, 1995 and 1996, the Company provided $1,449 and $1,188, respectively, for income taxes which represents provisions for minimum state taxes. The 1995 and 1996 federal tax benefit of $219,000 and $191,000, respectively, attributable to the Company's loss before taxes was offset by a corresponding provision to increase the Company's deferred tax asset valuation allowance. As of March 31, 1996, the Company's federal deferred tax attributes consisted primarily of net operating loss carryforwards ("NOL") in the approximate amount of $2.0 million. Approximately $1.3 million of the NOL is limited to use (approximately $100,000 per year) due to a change in ownership in November 1994 resulting from the merger between Pioneer and PCF. The deferred tax asset for the NOL is reduced by a corresponding valuation allowance for the same tax effected amount. Utilization of the NOL, which expire in varying amounts between 2000 and 2011, is dependent upon the Company's ability to generate taxable income in the future. F-12 7. DUE TO MORTGAGE BANKING COMPANIES The Company generally will only finance up to 98% of the total loan amount closed by the mortgage banking company. Upon sale of the loan to the investor group, proceeds for 100% of the loan amount are remitted to the Company by the investor. The Company applies such funds against amounts due from the mortgage banking company for principal and accrued interest on the 98% financed and will then remit the excess funds back to the mortgage banking company. 8. FIXED ASSETS During the year ended March 31, 1995, the Company abandoned its rented office located in New York and correspondingly wrote off the unamortized balance of the related leasehold improvements totaling $4,279. 9. DEFERRED LEGAL FEES Deferred legal fees are a consequence of the POR and are payable in four annual installments beginning on April 16, 1994. The Company has not paid the April 1995 installment of $28,990 and as of March 31, 1996, the following payments remain: April 1995 and 1996 $ 57,988 April 1997 20,728 -------- Total payments 78,708 Less - Discount factor (1,965) --------- Net book value - March 31, 1996 $ 76,743 ========
10. STOCKHOLDERS' EQUITY Reverse Stock Splits and Merger Effective in August 1994, the Board of Directors of Pioneer authorized a .31 for 1 reverse stock split for its Class A and Class B common stock and its Class A preferred stock. In connection with the merger of Pioneer with and into PCF in November 1994, all of the common and preferred shares of Pioneer outstanding as of the date of the merger (240,922 Class A common shares, 252,508 Class B common shares and 123,332 Class A preferred shares -- all after giving effect of the June 1996 reverse stock split described below) were exchanged on a one-for-one basis for common shares of PCF. Effective June 1996, the Board of Directors of the Company authorized a .758 for 1 reverse stock split of all of its then outstanding common stock. All share and per share amounts in these financial statements have been restated to give effect to the reverse stock splits and merger as if they had occurred on the first day of each period presented. Share Voting Agreements On October 25, 1994, in connection with a stock purchase agreement with an unrelated third party, Pioneer issued an additional 176,136 shares of its Class B common stock for $500,000 (which were exchanged for 176,136 common shares of PCF upon the consummation of the merger). The agreement gives the third party the right to acquire additional shares, if, in future periods, additional shares are issued to other parties so that this third party's percentage ownership in the Company does not fall below 20% of the total outstanding common shares. In connection with F-13 this stock purchase transaction, the unrelated third party entered into a share voting agreement with certain existing shareholders of the Company, who after the merger, own greater than 50 percent of the Company in the aggregate. The share voting agreement requires that all parties to the agreement will vote on all matters subject to shareholder approval in a consistent fashion. The agreement is in effect until the successful completion of the stock offering discussed in Note 1. Dividend Restriction The holders of the Company's common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The common stockholders are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. However, it is not presently anticipated that dividends will be paid on common stock in the foreseeable future as certain of the debt instruments to which the Company is a party prohibit or restrict the payment of dividends (see Note 12 for further discussion). Preferred Stock Prior to the merger between PCF and Pioneer, Pioneer had issued for $525,000, 123,332 shares of its Class A preferred shares with a 5% cumulative dividend (including the 45,033 shares converted from outstanding LOC borrowings during 1995). Parties related to executive officers of Pioneer owned 25,297 of such outstanding Class A preferred shares. All outstanding preferred shares were exchanged on a one-for-one basis for common shares of PCF on November 23, 1994 in connection with the merger between PCF and Pioneer. Through November 23, 1994, Pioneer accrued for the 5% dividend payment totaling $15,077, of which $4,954 has been paid. The remaining unpaid balance totaling $10,123 was forgiven by the preferred shareholders and the accrual was reversed by the Company. 11. STOCK OPTION PLAN The Company has adopted a Non-Qualified Stock Option Plan (the "Plan") which provides for the issuance of options to purchase up to 151,515 shares of the Company's common stock to persons who are at the time of grant, employees of, or consultants to, the Company. The Plan further provides for the automatic issuance of options to nonemployee directors of the Company. Each nonemployee director shall be granted options to acquire 15,000 shares of the Company's common stock on January 2, 1997, January 2, 2000 and January 2, 2003 (45,000 to each in total). Each grant shall vest at a rate of 3,788 shares per year of service and will expire 10 years from the date of grant to the extent not exercised. Upon completion of the merger between the Company and Pioneer, three directors of Pioneer became the first nonemployee directors of the Company. In accordance with the Initial Options provision, the directors received options to purchase 24,306 shares of common stock in the aggregate at an exercise price of $5.00 per share. Such options vest at the rate of 316 shares per month, provided, however, that none of these options shall be exercisable prior to March 1995. On March 1, 1995, two of the nonemployee directors were named President and Chief Executive Officer of the Company, respectively. As a result, the Initial Options granted to these individuals totaling 16,414 were forfeited. In addition, in June 1995, these two individuals were each granted additional options to purchase 75,758 shares of the common stock at an exercise price of $5.00 per share. These options (which were not granted pursuant to the Plan) are immediately exercisable and expire 5 years from the date of grant. F-14 The exercise price for all options issued/issuable under the Plan must be 100% of the fair market value of the Common Stock underlying the option at the time of grant. 12. COMMITMENTS AND CONTINGENCIES Plan of Reorganization Under the POR, the Company is contingently liable to its pre-Chapter 11 unsecured creditors, for such creditors' pro rata shares of noninterest-bearing notes (the "Notes") totaling $1,350,000. The payment terms are as follows: (i) Commencing as of the close of fiscal year 1995 (ending March 31, 1995) each Note holder shall receive a cash distribution in an amount equal to such holder's pro rata share of twenty percent of the Net Income Available for Note Payments, as defined, if Net Income, also as defined, for such fiscal year exceeds $400,000; (ii) Commencing with the close of fiscal year 1996, (ending March 31, 1996), and for all succeeding years thereafter, until full aggregate payment of $1,350,000 is made under the Notes, each Note holder shall receive a cash distribution equal to such Creditors' pro-rata share of twenty percent of the Net Income Available for Note Payments, if the Net Income for any such year exceeds $1,300,000. In addition, approximately $50,000 in professional fees incurred in connection with the POR were deferred and will only be paid to the extent the Notes are paid in full. In accordance with the POR, certain operating restrictions have been placed upon the Company until the time that all amounts due on the Notes have been paid in full. These restrictions include: - Incurring new debt in excess of $25,000, except for secured lending required in the ordinary course of the Company's mortgage lending operations. - Expending more than $25,000 in the aggregate in a calendar year to purchase or lease capital assets, except to replace existing assets. - Merging or consolidating with another business. - Expending more than $320,000 annually in the aggregate to the officers of the Company and placing limitations on salary increases. - Declaring dividends on any class of common stock, except that, if there should be a public offering of the securities of the Company, and, if at the option of the Company, fifty percent of the proceeds in excess of $5,000,000 from such offering are utilized for the payment of the Notes, then such dividend restriction shall be deemed waived. As of March 31, 1996, the Company was unable to determine whether it is probable that it will generate income in future years which would result in payments on the Notes. As such, no liability has been reflected in the Company's balance sheet for the Notes or the professional fees. F-15 Consulting Contract On February 15, 1994, the Company entered into a contract with an independent consultant to provide assistance to the Company with respect to the anticipation of a public offering of its stock (the Proposed Offering). Services to be provided include determining an appropriate structure for its Proposed Offering, to evaluate potential underwriters of such Proposed Offering, to assist in negotiating the terms of an agreement for an underwriter acceptable to the Company and to provide guidance to the Company's management with respect to the process that the Company must undertake in connection with the registration and public sale of its stock. The contract terminates on January 31, 1995. In consideration for these services, the Company issued to the independent consultant 55,682 shares of its Class B Common Stock. The value for these shares for financial reporting purposes was estimated to be $3.30 per share which management believes approximates the fair value per share for an unregistered share of common stock of the Company. It is anticipated that the shares issued to the independent consultant would not be registered in the proposed IPO. The Company is amortizing the expense on a straight-line basis over the term of the contract resulting in an expense of $23,000 and $96,000 in 1994 and 1995, respectively. The unamortized portion of the contract is reflected as a reduction to shareholders' equity. Effective September 30, 1994, as a result of a position taken by the National Association of Securities Dealers, Inc. that the value of the shares issued to the independent consultant must be considered as underwriters compensation (which would limit the amount of compensation allowed to be paid to the Underwriter in connection with the Company's anticipated equity offering), the Company and the independent consultant terminated their contract and the consultant returned all 55,682 shares of common stock back to the Company which were immediately canceled. The independent contractor further waived any and all entitlements and claims for payment for services rendered during the contract period through September 30, 1994. The unamortized portion of the consulting contract as of September 30, 1994 totaling $64,750 was reversed against additional paid-in capital and common stock. Employment Contracts On March 1, 1995, the Company entered into a two-year employment agreement with its Chief Financial Officer ("CFO") which provides for a base annual salary of $90,000 and $100,000 for the fiscal years ending March 31, 1996 and 1997, respectively. In addition, the Company must reimburse the CFO certain business-related expenses, provide for the use of a Company automobile and pay the premiums for life and long-term disability insurance. In the event of termination in connection with a change in control, the CFO is entitled to the balance of the amount due under this agreement plus an additional $100,000. The agreement also provides for the granting to the CFO an option to purchase 75,758 shares of the Company's common stock at an exercise price of $5.00 per share and a second grant on May 1, 1996 to purchase an additional 37,879 shares at the market price of the common stock estimated at that date to be $5.00 per share. Both options are immediately exercisable and expire five years from the date of grant. In June 1995, the Company entered into employment contracts with the chief executive officer and president providing for an annual salary of $55,000 for each individual commencing after the completion of the IPO. For the period from June 1995 through the completing of the IPO these F-16 officers were not entitled to any salary compensation. See Note 11 for a discussion of stock options awarded to these officers in June 1995. 13. OPERATING EXPENSES Operating expenses consisted of the following for the years ended March 31, 1995 and 1996:
1995 1996 ---- ---- Salaries and benefits $ 159,427 $ 134,555 Depreciation and amortization 110,498 101,300 Professional fees (includes amortization of consulting contract totaling $96,000 and $0 in 1995 and 1996, respectively) 167,010 114,382 Utilities 22,352 19,782 Rent 23,803 11,609 Repairs and maintenance 3,383 4,616 Other 57,989 47,465 ---------- ---------- $ 544,462 $ 433,709 ========== ==========
14. RELATED PARTY TRANSACTIONS Transactions with related parties (which consist of executive officers and shareholders of the Company and their related interests and family members) not disclosed elsewhere in these financial statements consist of the following: - On July 1, 1994, the Company paid in full $150,000 outstanding under two of the LOC Agreements to two related parties. Such related parties simultaneously satisfied their stock subscription obligation for shares of the Company's common stock in the amount of $150,000. - During September 1994, short-term advances were made by several related parties to the Company which were used in the Company's mortgage warehouse operations. As of September 30, 1994, approximately $391,000 of such advances were outstanding bearing interest at amounts ranging from the prime rate of interest to 10%. These advances plus the related accrued interest were paid in full on October 11, 1994. - For the years ended March 31, 1995 and 1996, certain family members of an executive officer of the Company were engaged to perform accounting and consulting services for the Company. Such individuals were compensated approximately $14,291 and $3,106 for these services in 1995 and 1996, respectively. 15. EVENTS OCCURRING SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT (UNAUDITED) Consummation of IPO On August 16, 1996, the Company consummated its IPO as further described in Note 1 above. The transaction resulted in the issuance of approximately 690,000 common shares and net proceeds to the Company of approximately $2.7 million. F-17 Proposed Equity Offering The Company is currently contemplating raising additional funds through the registration and sale of new shares of its common stock. The Company anticipates that it will issue a certain number of shares of its common stock along with detachable warrants in order to raise gross proceeds of approximately $7.5 million before consideration of the underwriter's discount and other offering expenses. The per share offering price for the common stock and warrants will be determined based upon the current market price of the Company's common stock on the transaction date. The Company's common stock was trading at approximately $1.63 per share on December 20, 1996. The warrants will be exercisable immediately after the consummation of the proposed equity offering for a period of five years. The warrants are also subject to the redemption by the Company for a four year period commencing on the first anniversary date of the consummation of the offering for a price of $.10 per warrant, provided certain conditions exist. F-18 PIONEER COMMERCIAL FUNDING CORP. BALANCE SHEETS
September 30 March 31 1996 1996 (unaudited) ------------- -------- ASSETS Cash and temporary cash investments $586,707 $98,349 Loans receivable, mortgage warehouse lending 3,086,542 3,512,775 Accrued interest and fees receivable 24,204 30,007 Deferred cost of equity offering -- 445,731 Fixed Assets Furniture and equipment 54,910 50,370 Proprietary computer software 472,865 469,655 ------------ ------------ 527,775 520,025 Less accumulated depreciation and amortization 352,686 302,035 ------------ ------------ Net Fixed Assets 175,089 217,990 ------------ ------------ Other assets 197,558 26,087 ------------ ------------ Total Assets $4,070,100 $4,330,939 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loans payable, mortgage warehouse $1,581,605 $3,254,235 Revolving lines, of credit -- 79,400 Bridge financing (notes totaling $100,000 less unamortized discount of $37,500) -- 62,500 Accrued interest payable 5,893 43,564 Due to mortgage banking companies 36,103 20,917 Accounts payable and accrued expenses 115,192 261,163 Deferred legal fees 74,793 76,743 ------------ ------------ Total Liabilities 1,813,586 3,798,522 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Common stock-$.01 par value; authorized 5,000,000 shares; 1,442,272 and 835,000 shares issued and outstanding at September 30 and March 31, 1996, respectively 14,423 8,350 Additional paid-in capital 10,563,027 8,598,634 Accumulated deficit (8,320,936) (8,074,567) ------------ ------------ Total shareholders' equity 2,256,514 532,417 ------------ ------------ Total liabilities and shareholders' equity $4,070,100 $4,330,939 ============ ============
The accompanying notes are an integral part of these balance sheets. F-19 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF OPERATIONS FOR THE THREE MONTH & SIX MONTH PERIODS ENDED SEPTEMBER 30, 1996 & 1995 (Unaudited)
Three Months Ended Six Months Ended September 30 September 30 ---------------------------- ---------------------- 1996 1995 1996 1995 ---- ---- ---- ---- INCOME Interest income $42,713 $1,966 $103,280 $6,452 Commissions and fees 1,500 3,000 1,500 3,000 Processing fees 12,275 1,940 24,943 1,940 Total income 56,488 6,906 129,723 11,392 DIRECT COSTS Interest expense - warehouse and revolving lines of credit 42,282 5,975 108,682 6,205 Interest expense - bridge financing 25,355 21,920 42,385 57,568 Bank charges and fees 2,289 1,693 5,905 2,846 Bank processing fees 3,300 -- 6,300 -- Total direct costs 73,226 29,588 163,272 66,619 LOSS BEFORE OPERATING EXPENSES (16,738) (22,682) (33,549) (55,227) OPERATING EXPENSES 121,913 93,639 218,379 193,870 Loss from operations (138,651) (116,321) (251,928) (249,097) OTHER INCOME (EXPENSE) Interest income - other 9,037 16,796 9,307 23,590 Interest expense - other (1,178) (1,178) (2,356) (2,356) Total other income (expense) 7,859 15,618 6,951 21,234 LOSS BEFORE INCOME TAXES (130,792) (100,703) (244,977) (227,863) PROVISION FOR INCOME TAXES -- -- 1,392 1,180 Net loss ($130,792) ($100,703) ($246,369) ($229,043) LOSS PER SHARE OF COMMON STOCK ($0.11) ($0.12) ($0.25) ($0.28) WEIGHTED AVERAGE NUMBER OF SHARES 1,155,315 825,000 996,629 825,000
The accompanying notes are an integral part of these statements. F-20 PIONEER COMMERCIAL FUNDING CORP. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1996 (Unaudited)
Common Additional Accumulated Total Stock Paid-in Deficit Stockholders' Capital Equity ------ ---------- ----------- ------------- Balances March 31,1996 $8,350 $8,598,634 ($8,074,567) $532,417 Issuance of 7,272 common shares in connection with bridge financing 73 (73) -- -- Issuance of 600,000 shares of common stock and warrants 6,000 1,964,466 -- 1,970,466 Net loss for the period -- -- (246,369) (246,369) ------- ------------ ----------- ------------ $14,423 $10,563,027 ($8,320,936) $2,256,514
The accompanying notes are an integral part of this statement. F-21 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 1996 and 1995 (Unaudited)
1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ($246,369) ($229,043) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 110,936 98,267 (Increase) decrease in Accrued interest receivable 5,803 10,360 Other assets (191,900) (20,758) Increase (decrease) in Accrued interest payable (37,671) (7,792) Due to mortgage banking companies 15,186 (34,834) Accounts payable and Accrued expenses (150,277) 26,258 Total adjustments (247,923) 71,501 Net cash used in operating activities (494,292) (157,542) CASH FLOWS FROM INVESTING ACTIVITIES Increase in Mortgage Warehouse Loans Receivable 426,233 509,642 Purchase of Fixed Assets (7,750) (350) Net cash provided by investing activities 418,483 509,292 CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in borrowings used in operations, net of issuance costs (1,672,630) (545,930) Decrease in revolving line of credit and bridge financing (179,400) (Increase) decrease in deferred costs of equity offering 445,731 (81,585) Proceeds from issuance of stock 1,970,466 Net cash provided by (used in) financing activities 564,167 (627,515) Net increase (decrease) in cash 488,358 (275,765) CASH AND TEMPORARY CASH INVESTMENTS APRIL 1,1996 and 1995 98,349 437,574 CASH AND TEMPORARY CASH INVESTMENTS SEPTEMBER 30,1996 and 1995 $586,707 $161,809 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest Paid $130,468 $2,872
The accompanying notes are an integral part of these statements. F-22 PIONEER COMMERCIAL FUNDING CORP. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (Unaudited) NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation In the opinion of management, the accompanying unaudited financial statements for Pioneer Commercial Funding Corp. (the "Company") contain all adjustments of a recurring nature considered necessary for a fair presentation of its financial position as of September 30, 1996, the results of operations for the three and six month periods ended September 30, 1996 and 1995 and its cash flows for the six months ended September 30, 1996 and 1995. The results of operations for the six month and three month periods ended September 30, 1996 and 1995 are not necessarily indicative of the Company's results of operations to be expected for the entire year. The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not include all information and footnotes required to be in conformity with generally accepted accounting principles. The financial information provided herein, including the information under the heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations," is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's March 31, 1996 audited financial statements and notes thereto, together with the Managements Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 1996 and for the year then ended included in the Company's definitive prospectus dated August 12, 1996. F-23 PIONEER COMMERCIAL FUNDING CORP. NOTES TO FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 1996 (Unaudited) 2. OPERATING EXPENSES Operating expenses consisted of the following:
Three Month Period Ended Six Month Period Ended September 30, September 30, ------------------------ ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Salaries and benefits $33,488 $29,759 $52,821 $66,859 Depreciation and amortization 25,325 25,325 50,650 50,650 Professional fees 13,140 12,703 26,196 25,203 Utilities 5,599 4,555 11,144 8,853 Temporary staff services 13,165 9,785 23,849 15,776 Rent 2,903 2,903 5,805 5,805 Other 28,293 8,609 47,914 20,724 -------- ------- -------- -------- $121,913 $93,639 $218,379 $193,870 ======== ======= ======== ========
3. INITIAL PUBLIC OFFERING The Company consummated its initial public offering (the "Offering") on August 16, 1996, at which time it issued 600,000 shares of common stock (.01 par value) for $5.00 per share and redeemable warrants to purchase 600,000 additional shares of the Company's common stock at an exercise price of $5.50 per share for $.10 per warrant (the "Warrants"). The Warrants are exercisable until August 12, 2000. On October 4, 1996, the Company issued an additional 90,000 Warrants pursuant to the over-allotment option granted to its underwriter with respect to the Offering. The Company received net proceeds from the Offering of $2,675,556 (excluding the proceeds of $7,830 derived from the underwriter's exercise of the over-allotment option), and recorded an increase to stockholders' equity in the amount of $1,970,466 which is net of $705,090 in deferred costs of the equity offering which were paid for by the Company prior to consummation of the transaction. F-24 ======================================= ===================================== NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER, SOLICITATION OR SALE MADE HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE PROSPECTUS. ----------------- TABLE OF CONTENTS Page Available Information............... Prospectus Summary.................. Risk Factors........................ Use of Proceeds..................... Capitalization...................... Dividend Policy..................... Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Business............................ Management.......................... Certain Transactions................ Principal Security Holders.......... Shares Eligible for Future Sale..... Underwriting........................ Legal Matters....................... Experts............................. Financial Statements................ ----------------- 3,750,000 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE CLASS A COMMON STOCK PURCHASE WARRANT PIONEER COMMERCIAL FUNDING CORP. ---------------------- P R O S P E C T U S ---------------------- LT LAWRENCE & CO., INC. _________, 1997 ======================================= ===================================== PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article VIII of the bylaws of Pioneer Commercial Funding Corp. (the "Company") provide for the indemnification of directors and officers to the fullest extent permitted by law. Section 722 of the New York Business Corporation Law (the "BCL") provides that a corporation may indemnify an individual made party to a proceeding because he is or was a director or officer in certain situations, provided that the director acted in good faith for a purpose which he reasonably believed to be in the best interests of the corporation. In addition, Section 723 of the BCL provides that a corporation shall indemnify a director or officer who prevails entirely in the defense of any proceeding to which he was a party because he is or was a director, against reasonable expenses incurred by him in connection with the proceeding. Section 724 of the BCL provides that, notwithstanding any action taken by the corporation, or by its shareholders or directors to deny indemnification to any officer or director, he may apply for and receive such indemnification, upon good cause shown, to the same extent permitted under BCL Section 722 upon application for such relief to the appropriate court. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The Company maintains directors' and officers' liability insurance coverage with limits of $1,000,000 per occurrence. The Company has agreed to enter into employment agreements with Arthur H. Goldberg and Elie Housman, and it has entered into an employment agreement with Glenda Klein, providing for indemnification to the fullest extent permitted by law. The Company has also entered into indemnification agreements with each of its other directors which provide for indemnification to the fullest extent permitted by law. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of Common Stock being registered. All amounts are estimates except the registration fee, the NASD and Nasdaq SmallCap Market fees and the Boston Stock Exchange and pacific Stock Exchange fees. II-1
Amount To Be Paid --------- SEC Registration fee....................................... $ 4,668 NASD Filing fee............................................ 2,041 Nasdaq SmallCap Market fees................................ 14,100 Boston Stock Exchange listing fees......................... 15,000 Pacific Stock Exchange filing fees......................... 22,500 Printing expenses.......................................... 75,000 Legal fees and expenses.................................... 135,000 Accounting fees and expenses............................... 45,000 Blue sky fees and expenses................................. 45,000 Warrant agent fees......................................... 7,500 Stock and Class A Warrant certificates..................... 3,500 Miscellaneous.............................................. 30,691 -------- Total............................................... $400,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The following tables set forth (i) the number of shares of Common Stock issued by the Company and the number of shares of common stock and preferred stock issued by Pioneer during the past three years without registration under the Securities Act, (ii) the date of such issuance, and (iii) the consideration per share for each issuance. There were no underwriting discounts or commissions paid in connection with the issuance of any of these securities. Unless otherwise noted, the consideration was paid in cash.
The Company: - ------------ Number of Shares Consideration Purchaser Date of Common Stock Per Share ($) - --------- ---- ----------------- ------------- Arthur H. Goldberg 3/23/94 92,755 (1) (2) Elie Housman 3/23/94 55,653 (1) (2) Jon Housman 3/23/94 18,551 (1) (2) Daniel Housman 3/23/94 18,551 (1) (2) Richard Friedman 3/10/94 7,576 (1) (3) 1/15/96 2,424 (4) Richard Gurian 3/10/94 1,893 (1) (3) 2/01/96 3,107 (5) Jeffrey Markowitz 3/10/94 7,576 (1) (3) 1/15/96 2,424 (4) Christian D. and Katherine Ericksen 3/10/94 5,682 (1) (3) 2/01/96 9,318 (5)
II-2
Pioneer (3): - ------------ Class B Class A Purchaser Date Common Stock Preferred Stock Per Share($) - --------- ---- ------------ --------------- ------------ Uri Lieber 5/3/93 237,000 (6a) (7) Esther Bier 5/3/93 20,000 (6b) (7) Richard Fried 5/3/93 50,000 (6c) (7) Glenda Klein 5/3/93 10,000 (6d) (7) Harry Falk 1/27/94 40,000 (6e) 1.00 Uri Guefan 1/27/94 25,000 (6f) 1.00 Imperial Valley Emergency Phy- sicians Retire- ment Trust 1/27/94 25,000 (6g) 1.00 Allyson Klein 1/27/94 5,000 (6h) 1.00 Tamar Ruth Lieber 1/27/94 100,000 (6i) 1.00 Michael Loewenthal 1/27/94 100,000 (6j) 1.00 Martha Jacob Reis 1/27/94 30,000 (6k) 1.00 Shamiz, S.A. 6/7/94 186,916(6l) 1.07(8) ICTS Holland Production B.V. 10/25/94 176,136 (1) 2.84(1)
- ------------------------------- (1) Adjusted to account for the 1 to .758 reverse split of the Company's Common Stock implemented in June 1996 (the "June 1996 Stock Split"). (2) The per share price (adjusted to account for the June 1996 Stock Split) of $.81 was determined prior to the negotiation of the Bridge Financing transactions to be the fair market value of such shares on the basis of the high risk undertaken by such investors in subscribing for the shares of a company which had no business operations of its own, and which would not be able to merge with Pioneer in the absence of any assurance, at that time, that the public offering upon which the merger of PCF and Pioneer was conditioned, would be achieved. A valuation of $150,000 was determined arbitrarily and did not reflect any inherent fair market value therein. II-3 (3) Represents shares issued as additional consideration in connection with certain interim financing arrangements between the Company and certain lenders. (4) Represents shares issued to counter the dilutive effects of the June 1996 Stock Split in consideration of the shareholder's waiver of any defaults which may have existed under a Bridge Financing agreement. (5) Represents shares issued to counter the dilutive effects of the June 1996 Stock Split in consideration of the shareholder's waiver of any defaults which may have existed under a Bridge Financing agreement, and additional shares issued in consideration of the shareholder's agreement to extend the maturity date under such Bridge Financing agreement. (6) In August, 1994, Pioneer implemented, in contemplation of its merger with and into the Company, a reverse stock split, pursuant to which the aggregate number of issued and outstanding shares of all classes of its capital stock were reduced from 2,060,035 shares to 655,126 shares (the "Stock Split"). As a result thereof, and the June 1996 Stock Split, the number of shares of common and preferred stock held by each of Pioneer's shareholders was reduced and thereafter converted into the following shares of the Company's Common Stock: (6a) 57,098 (6b) 4,818 (6c) 12,046 (6d) 2,409 (6e) 9,636 (6f) 6,023 (6g) 6,023 (6h) 1,205 (6i) 24,092 (6j) 24,092 (6k) 7,228 (6l) 45,033 (7) These shares were issued immediately subsequent to Pioneer's emergence from bankruptcy. The per share price thereof of $.01 per share was determined arbitrarily and did not reflect any inherent fair market value therein. (8) On June 7, 1994, this shareholder's revolving credit loan in the principal amount of $200,000 was converted into preferred shares at the rate of $1.07 per share. Exemption from the registration provisions of the 1933 Act for the transactions set forth above is claimed under Section 4(2) of the Securities Act, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. No underwriting fees were paid in connection with the foregoing transactions. However, a finder's fee of $20,000 was paid to The Blackmor Group, Inc., an unaffiliated party, for arranging the Bridge Financing. II-4 ITEM 27. EXHIBITS. Exhibit No. Description 1.1 Form of Underwriting Agreement.* 1.2 Form of Agreement Among Underwriters.* 1.3 Form of Selected Dealers Agreement.* 2.1 Modified Plan of Merger Between the Company and Pioneer. 3.1 Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. 3.3 Certificate of Amendment of the Company's Certificate of Incorporation. 4.1 The Company's Non-Qualified Stock Option Plan. 4.2 Specimen Stock Certificate of the Company's Common Stock. 4.3 Specimen Class A Warrant Certificate.* 4.4 Form of Class A Warrant Agreement. * 4.5 Form of Lockup Agreement.* 4.6 Form of Representative's Warrant Agreement and Representative's Warrant Certificate.* 4.7 Form of Option issued to the Company's Executives. 4.8 Form of Option issued to United Mizrahi Bank & Trust Company. 5 Opinion of Hall Dickler Kent Friedman & Wood, regarding the legality of the Units, Common Stock and the Class A Warrants. * 10.1 Revolving Line of Credit and Security Agreement between United Mizrahi Bank and Trust Company and the Company, as amended. 10.2 Employment Agreement between the Company and Glenda S. Klein. II-5 10.3 Stock Purchase Agreement dated as of December 23, 1996 between the Company and Trans Lending Corporation 10.4 Noncompete Agreement dated as of December 23, 1996 between the Company and Kenneth Germain 10.5 Employment Agreement dated as of December 23, 1996 between Trans Lending and Kenneth Germain.* 10.6 Employment Agreement between the Company and Arthur H. Goldberg.* 10.7 Employment Agreement between the Company and Elie Housman.* 23.1 Consent of Independent Certified Public Accountants (See Part II, Page 10). 23.2 Consent of Counsel (See Part II, Page 11). 24 Power of Attorney (See Part II, Page 9). - ---------------------------------------- * To be filed by amendment. ITEM 28. UNDERTAKINGS. A. Certificates The Registrant hereby undertakes to provide to the Underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. B. Rule 415 Offering The Registrant hereby undertakes: II-6 (1) To file, during any period in which it offers or sells any of the securities which are the subject of the prospectus included within this Registration Statement, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events which, individually or together, represent fundamental change in the information set forth in the Registration Statement; (iii) to include any additional or changed material information with respect to the plan of distribution. (2) For purposes of determining any liability under the Securities Act, the Registrant will treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. C. Request for Acceleration of Effective Date The Company may elect to request acceleration of the effective date of the Registration Statement under Rule 461 of the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. D. Reliance on Rule 430A (1) For purposes of determining liability under the Securities Act, the Registrant will treat the information omitted from the form of prospectus filed II-7 as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act ('ss.''ss.'230.424(b)(1), (4) or 230.497(h)) as part of this Registration Statement as of the time the Commission declared it effective. (2)For purposes of determining liability under the Securities Act, the Registrant will treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City, County and State of New York on the 27th day of December, 1996 Pioneer Commercial Funding Corp. By: /s/ Arthur H. Goldberg -------------------------------- Arthur H. Goldberg, Chief Executive Officer (Principal Executive Officer) In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated. KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Arthur H. Goldberg his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. SIGNATURE TITLE DATE --------- ----- ----- /s/ Arthur H. Goldberg Director, Chief December 27, 1996 - --------------------------- (Principal) Executive Arthur H. Goldberg Officer /s/ Elie Housman Director, December 27, 1996 - --------------------------- President Elie Housman II-9 /s/ Glenda Klein Director, Sr. Vice Pres., December 27, 1996 - --------------------------- Secretary, Treasurer, Glenda Klein Chief Financial (Principal Accounting) Officer) - --------------------------- Director December , 1996 Tamar Lieber /s/ Richard Fried Director December 27, 1996 - --------------------------- Richard Fried - --------------------------- Director December , 1996 Boaz Harel /s/ Mark Roth Director December 27, 1996 - --------------------------- Mark Roth II-10 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Pioneer Commercial Funding Corp. As independent public accountants, we hereby consent to the use of our report (and all references made to our firm) with respect to the financial statements for the years ended March 31, 1995 and 1996 for Pioneer Commercial Funding Corp. included in or made part of this registration statement and prospectus. ARTHUR ANDERSEN LLP New York, New York December 27, 1996 II-11 CONSENT OF COUNSEL We consent to use of our firm's name and to statements with respect to our Firm, as they appear under the heading "Legal Matters" in the Prospectus which is included in Part I of this Registration Statement. HALL DICKLER KENT FRIEDMAN & WOOD LLP New York, New York December 27, 1996 II-12 EXHIBIT INDEX Exhibit Number Description - -------- ------------ 2.1 Modified Plan of Merger Between the Company and Pioneer. 3.1 Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. 3.3 Certificate of Amendment of the Company's Certificate of Incorporation. 4.1 The Company's Non-Qualified Stock Option Plan. 4.2 Specimen Stock Certificate of the Company's Common Stock. 4.7 Form of Option issued to the Company's Executive. 4.8 Form of Option issued to United Mizrahi Bank & Trust Company 10.1 Revolving Line of Credit and Security Agreement between United Mizrahi Bank and Trust Company and the Company, as amended 10.2 Employment Agreement between the Company and Glenda S. Klein. 10.3 Stock Purchase Agreement dated as of December 23, 1996 between the Company and Trans Lending Corporation 10.4 Noncompete Agreement dated as of December 23, 1996 between the Company and Kenneth Germain 23.1 Consent of Independent Certified Public Accountants (See Part II, Page 10). 23.2 Consent of Counsel (See Part II, Page 11). 24 Power of Attorney (See Part II, Page 9). STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as .....'ss'. EX-2 2 EXHIBIT 2.1 PLAN OF MERGER of PIONEER COMMERCIAL FUNDING CORP., a New York Corporation into PCF ACQUISITION CORP., a New York Corporation The Plan of Merger (hereafter designated the "Plan"), as heretofore adopted, whereby Pioneer Commercial Funding Corp., a New York corporation (hereinafter called "Pioneer"), shall merge with and into PCF Acquisition Corp., a New York corporation (hereinafter called the "Surviving Corporation"), is hereby modifed and restated, as follows: 1. The constituent corporations to this Plan are Pioneer and the Surviving Corporation. The surviving corporation under this merger shall be the Surviving Corporation. 2. The designation and number of outstanding shares of each class and series of capital stock for each constituent corporation to this Plan are, as follows: (a) the Surviving Corporation has present authorized capital consisting of 5,000,000 shares of common stock, $.01 par value, all of which stock is voting stock and of which 274,874 shares are issued and outstanding. (b) Pioneer has present authorized capital consisting of (i) 1,000,000 shares of Class A Common Stock, $.01 par value, all of which stock is voting stock and of which 318,017 shares are issued and outstanding; (ii) 1,000,000 shares of Class B Common Stock, $.01 par value, all of which stock is voting stock and of which 406,811 shares are issued or outstanding; and (iii) 2,000,000 shares of Class A Preferred Stock, $.01 par value, none of which stock is voting stock and of which 162,798 shares are issued and outstanding. 3. The terms and conditions of the merger, including the manner and basis of converting the shares of Pioneer into the shares or other securities of the Surviving Corporation, are as follows: (a) Each issued and outstanding share of Class A Common Stock, Class B Common Stock and Class A Preferred Stock of Pioneer held by shareholders of Pioneer immediately prior to the effective date of the merger to be effected by this Plan (the "Effective Date") shall be changed and converted, upon such Effective Date, into one share of the Common Stock of the Surviving Corporation. (b) After the Effective Date, each holder of outstanding certificates representing shares of capital stock of Pioneer shall surrender the same to the Surviving Corporation and each such holder shall be entitled, upon such surrender, to receive the number of shares of Common Stock of the Surviving Corporation as is provided for in subparagraph (a) of this paragraph 3. (c) Upon the Effective Date, the separate existence of Pioneer shall cease and said corporation shall be merged with and into the Surviving Corporation and the Surviving Corporation shall possess all the rights, privileges, powers, and franchises of a public and private nature and shall be subject to all the duties of each of the corporations parties to this Plan, and all and singular the rights, privileges, powers, and franchises of each of the corporations parties to this Plan, and all property, real, personal, and mixed, and all debts due to any of the corporations parties to this Plan on whatever account shall be vested in the Surviving Corporation; and all property, rights, privileges, powers, contracts, and franchises and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the respective corporations parties to this Plan; but all rights of creditors and all liens upon any property of either of the corporations parties to this Plan shall be preserved unimpaired and all debts, liabilities and duties of the respective corporations parties to this Plan shall thenceforth attach to the Surviving Corporation and be enforceable against it to the same extent as if said debts, liabilities, and duties had been incurred or contracted by it. (d) If, at any time, the Surviving Corporation shall consider or be advised that any further assignments or assurances in law or any other things are necessary or desirable to vest in the Surviving Corporation, according to the terms hereof, the title to any property or rights of Pioneer, the proper officers and directors of Pioneer shall and will execute and make all such proper assignments and assurances and do all things necessary or proper to vest title in such property or rights in the Surviving Corporation and otherwise to carry out the purposes of this Plan. (e) Upon the Effective Date, the assets and liabilities of the corporations parties to this Plan shall be carried on the books of the Surviving Corporation at the amounts at which they respectively shall be carried on such date on the books of the corporations parties to this Plan. The capital surplus and earned surplus of the Surviving Corporation shall be the sum of the respective capital surpluses and earned surpluses of the corporations parties to this Plan, subject in each case to such intercompany adjustments or eliminations as may be required to give effect to the merger. The aggregate amount of the net assets of the corporations parties to this Plan legally available for the payment of dividends immediately prior to the merger, to the extent that the value thereof is not transferred to stated capital by the issuance of shares or otherwise, shall continue to be available for the payment of dividends by the Surviving Corporation. (f) On the Effective Date, the Board of Directors of the Surviving Corporation shall be expanded from three members to six members. Messrs. Arthur H. Goldberg and Elie Housman, who presently serve as directors of both Pioneer and the Surviving Corporation, shall continue to serve as directors of the Surviving Corporation upon and after consummation of the merger to be effected by this Plan. Steven D. Dreyer, the remaining member of the presently constituted Board of Directors of the Surviving Corporation, shall be deemed to have resigned as such director upon consummation of the merger to be effected by this Plan, and the vacancies created by such resignation and said expansion of the Board of the Surviving Corporation shall be filled by Ms. Glenda Klein, and Messrs. Uri Lieber, Ezra Harel and Richard Fried, each of whom currently serves as a director of Pioneer. Each of the directors of the Surviving Corporation immediately after consummation of the merger to be effected by this Plan shall continue in office until he or she resigns and/or his or her successor is duly elected. (g) Immediately prior to the consummation of the merger to be effected by this Plan, all of the then duly elected officials of the Surviving Corporation shall be deemed to have resigned from each of the official positions respectively held by them. Upon consummation of the merger to be effected by this Plan, the following persons shall be deemed to have been duly elected to serve as officials of the Surviving Corporation in the capacities hereinbelow set forth: Uri Lieber President (Chief Executive Officer) and Assistant Secretary Glenda Klein Senior Vice President, Secretary, Treasurer and Chief Financial Officer Richard Fried Vice President Each of the officers of the Surviving Corporation immediately after consummation of the merger to be effected by this Plan shall continue in office until he or she resigns and/or his or her successor is duly elected. (h) The bylaws of the Surviving Corporation, as they shall exist on the Effective Date, shall be and remain the bylaws of the Surviving Corporation until the same shall be altered, amended, or repealed as therein provided. (i) On the Effective Date, the name of the Surviving Corporation shall be changed to Pioneer Commercial Funding Corp. 4. In order to implement the change of the name of the Surviving Corporation, as provided in paragraph 3(h) hereof, the Certificate of Incorporation of the Surviving Corporation shall be amended as follows: Paragraph FIRST shall be amended to read: "FIRST: The name of the corporation is PIONEER COMMERCIAL FUNDING CORP." 5. Anything herein or elsewhere contained to the contrary notwithstanding, the Plan may be modified, and/or terminated and abandoned by mutual consent of the Boards of Directors of the corporations party hereto at any time prior to the Effective Date. 6. The Effective Date (as such term is used herein) of the Plan, and the merger to be effected hereby, shall be the date when the certificate of merger required to be filed by the New York Department of State in order to effectuate the merger contemplated herein shall have been filed. IN WITNESS WHEREOF, each of the corporations, parties hereto, has caused this Plan to be executed on its behalf by the officers hereinbelow identified. Dated: As of November 4, 1994 PIONEER COMMERCIAL FUNDING CORP, PCF ACQUISITION CORP., a New York Corporation a New York corporation By:_____________________________ By:___________________________ Uri Lieber, President Arthur H. Goldberg, Pres. EX-3 3 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF PCF ACQUISITION CORP. Under Section 402 of the Business Corporation Law of the State of New York The undersigned, being of legal age, in order to form a corporation under and pursuant to the laws of the State of New York, do hereby set forth as follows: FIRST: The name of the corporation is PCF ACQUISITION CORP. SECOND: This corporation is formed to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, provided that it is not formed to engage in any act or activity which requires the consent or approval of any state official, department, board, agency or other body, without such approval or consent first being obtained. THIRD: The office of the corporation in the State of New York shall be located in the County of New York. FOURTH: a) The corporation shall be authorized to issue the following shares:
Class Number of Shares Par Value ----- ---------------- --------- COMMON 5,000,000 $.01
b) No holder of any shares of the corporation shall, because of his ownership of shares of the corporation, have a pre-emptive or other right to purchase, subscribe for, or take any part of any shares of the corporation, or any part of any notes, debentures, bonds, or other securities convertible into or providing for options or warrants to purchase shares of the corporation which are issued, offered, or sold by the corporation after its incorporation, whether the shares, notes, debentures, bonds, or other securities, be authorized by this certificate of incorporation or by an amended certificate duly filed and in effect at the time of the issuance, offer, or sale of such shares, notes, debentures, bonds, or other securities. Any part of the shares authorized by this certificate of incorporation, or by an amended certificate duly filed and any part of any notes, debentures, bonds, or other securities convertible into or providing for options or warrants to purchase shares of the corporation may at any time be issued, offered for sale, and sold or disposed of by the corporation, pursuant to a resolution of its Board of Directors and to such persons and upon such terms and conditions as the Board of Directors may, in its sole discretion, deem proper and advisable, without first offering to existing shareholders any part of such shares, notes, debentures, bonds, or other securities. FIFTH: The Secretary of State is designated as the agent of the corporation upon whom process against the corporation may be served, and the address to which the Secretary of State shall mail a copy of any process against the corporation served upon him is c/o Ohrenstein & Brown, 230 Park Avenue-32nd Floor, New York, New York 10169. SIXTH: The shareholders or the Board of Directors of the corporation shall have the power to adopt, alter, amend or repeal the By-Laws of the corporation. SEVENTH: (a) The corporation may, to the fullest extent permitted by Section 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have power to indemnify under the said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the persons so indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity by holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefits of the heirs, executors and administrators of such a person. (b) A director of this Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty in his/her capacity as a director, unless a judgment or other final adjudication adverse to him/her establishes that (1) his/her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law, or (ii) he/she personally gained in fact a financial or other advantage to which he/she was not legally entitled or (iii) his/her acts violated Section 719 of the Business Corporation Law. EIGHTH: A director or officer of the Corporation shall not, in the absence of fraud, be disqualified from his/her office by dealing with or contracting with the Corporation as vendor, purchaser or otherwise. In the absence of fraud, no transaction, contract or act of the Corporation, the Board of Directors, the Executive Committee of the Board of Directors, or any other duly constituted committee, shall be void, voidable or affected by reason of the fact that any director or officer of the Corporation, or any firm of which any director or officer of the Corporation is a member, or any corporation of which any director or officer of the Corporation is an officer, director, or shareholder, is in any way interested in the transaction, contract or act, if either: (a) the fact of such common directorship, officership, or financial or other interest is disclosed or known to the Board of Directors or the Executive Committee, and the Board of Directors or the Executive Committee approves the transaction, contract or act by a vote sufficient for such purposes without the vote of such interested director, if any; provided that any such director may be counted in determining the presence of a quorum at any such meeting of the Board of Directors or the Executive Committee; or (b) the fact of such common directorship, officership or financial or other interest is disclosed or known to the shareholders entitled to vote on the transaction, contract or act and the transaction, contract or act is approved by vote of the shareholders entitled to vote thereon, whether or not the Board of Directors or the Executive Committee has approved the transaction, contract or act. Any such transaction, contract or act which is ratified by a majority in interest of a quorum of the shareholders of the Corporation having voting power at any annual or special meeting called for such purpose, shall, if such common ownership or financial or other interest is disclosed in the notice of the meeting, be valid and as binding as though approved or ratified by every shareholder of the Corporation, except as otherwise provided by the laws of the State of New York. IN WITNESS WHEREOF, we hereunto sign our names and affirm that the statements made herein are true under the penalties of perjury, this eighth day of March, 1994.
NAME ADDRESS ---- ------- S/MARK SKUBICKI --------------------------------- 10 Bank Street Mark Skubicki, Incorporator White Plains, New York 10606 S/MARIA R. FISCHETTI ---------------------------------- 10 Bank Street Maria R. Fischetti, Incorporator White Plains, New York 10606
CERTIFICATE OF INCORPORATION OF PCF ACQUISITION CORP. Under Section 402 of the Business Corporation Law of the State of New York Ohrenstein & Brown 230 Park Avenue, 32nd Floor New York, New York 10169 EX-3 4 EXHIBIT 3.2 ================================================================================ BY-LAWS OF PIONEER COMMERCIAL FUNDING CORP. Adopted: March 9, 1994 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I - OFFICES ................................................... 1 1.01 Location ................................................... 1 1.02 Change of Location ......................................... 1 ARTICLE II - SHAREHOLDERS ............................................. 1 2.01 Place of Meetings .......................................... 1 2.02 Annual Meeting ............................................. 1 2.03 Special Meetings ........................................... 2 2.04 List of Shareholders Entitled to Vote ...................... 2 2.05 Notice of Meetings ......................................... 3 2.06 Adjourned Meetings and Notice Thereof ...................... 3 2.07 Quorum ..................................................... 3 2.08 Voting ..................................................... 3 2.09 Waivers of Notice of Meetings .............................. 4 2.10 Action by Consent of Shareholders .......................... 4 2.11 Proxies .................................................... 4 2.12 Voting of Pledged Shares ................................... 5 2.13 Voting of Redeemable Shares ................................ 5 2.14 Officers of Meetings ....................................... 5 2.15 Order of Business .......................................... 5 2.16 Use of Ballots ............................................. 6 2.17 Inspectors ................................................. 6 ARTICLE III - BOARD OF DIRECTORS ...................................... 6 3.01 General Powers ............................................. 6 3.02 Number of Directors ........................................ 7 3.03 Qualification .............................................. 7 3.04 Election ................................................... 7 3.05 Term ....................................................... 7 3.06 Resignation and Removal .................................... 7 3.07 Vacancies .................................................. 8 3.08 Quorum and Voting .......................................... 8 3.09 Regulations ................................................ 8 3.10 Annual Meeting of Board of Directors ....................... 9 3.11 Regular Meetings ........................................... 9 3.12 Special Meetings ........................................... 9 3.13 Notice of Meetings ......................................... 9 3.14 Compensation of Directors .................................. 10 3.15 Action Without Meeting ..................................... 10 3.16 Use of Communication Equipment ............................. 10 ARTICLE IV - COMMITTEES OF THE BOARD OF DIRECTORS ..................... 10 4.01 Establishment of Committees ................................ 10 4.02 Executive Committee ........................................ 11 4.03 Audit Committee ............................................ 11 4.04 Finance Committee .......................................... 12 4.05 Stock Option Committee ..................................... 12 4.06 Nominating Committee ....................................... 13 4.07 Presiding Officer and Secretary ............................ 13 4.08 Vacancies .................................................. 13 4.09 Meetings ...................................................... 13 4.10 Notice of Meetings ............................................ 13 4.11 Quorum; Voting ................................................ 13 4.12 Reports ....................................................... 14 4.13 Limitations on Powers ......................................... 14 4.14 Powers of the Board ........................................... 14 ARTICLE V - OFFICERS .................................................... 14 5.01 Election ...................................................... 14 5.02 Additional Offices ............................................ 15 5.03 Election and Term of Office ................................... 15 5.04 Vacancies ..................................................... 15 5.05 Removal, Suspension and Resignation ........................... 15 5.06 Powers and Duties ............................................. 15 5.07 Delegation of Duties of Officers .............................. 17 5.08 Bond .......................................................... 17 ARTICLE VI - CAPITAL SHARES ............................................. 17 6.01 Issuance of Certificates for Shares ........................... 17 6.02 Signatures on Share Certificates .............................. 17 6.03 Stock Ledger .................................................. 18 6.04 Regulations Relating to Transfer .............................. 18 6.05 Transfers ..................................................... 18 6.06 Cancellation .................................................. 19 6.07 Lost, Destroyed, Stolen, and Mutilated Certificates ........... 19 6.08 Fixing of Record Dates ........................................ 19 ARTICLE VII - DIVIDENDS ................................................. 20 ARTICLE VIII - INDEMNIFICATION .......................................... 20 8.01 Indemnification ............................................... 20 8.02 Insurance for Indemnification of Directors and Officers ....... 22 ARTICLE IX - MISCELLANEOUS PROVISIONS ................................... 22 9.01 Corporate Seal ................................................ 22 9.02 Fiscal Year ................................................... 23 9.03 Waiver of Notice .............................................. 23 9.04 Execution of Instruments, Contracts, etc ...................... 23 ARTICLE X - AMENDMENTS; EMERGENCY BY-LAWS ............................... 24 10.1 By Shareholders ............................................... 24 10.2 By Directors .................................................. 24 BY-LAWS of PIONEER COMMERCIAL FUNDING CORP. a New York Corporation (the "Corporation") ARTICLE I - OFFICES 1.01 Location. The address of the registered office of the Corporation in the State of New York and the name of the registered agent at such address, if any, shall be as specified in the Certificate of Incorporation or, if subsequently changed, as specified in the most recent certificate of change filed pursuant to law. The Corporation may also have other offices at such places within or without the State of New York as the Board of Directors may from time to time designate or the business of the Corporation may require. 1.02 Change of Location. In the manner permitted by law, the Board of Directors may change the address of the Corporation's registered office in the State of New York and the Board of Directors may make, revoke or change the designation of the registered agent. ARTICLE II - SHAREHOLDERS 2.01 Place of Meetings. Meeting of shareholders shall be held at the principal office of the Corporation or at such place within or without the State of New York as the Board of Directors shall authorize. 2.02 Annual Meeting. The annual meeting of shareholders shall be held each year on a date and at a time to be selected by the President or the Board of Directors at least 30 days before such meeting or, in the event the President or the Board of Directors shall not make such selection at least 30 days prior to the following indicated date, at 10:00 A.M. on the last Friday in September of each year (if not a legal holiday, and if a legal holiday, then on the next business day), at such place within or without the State of New York as shall be stated in the notice of meeting. At such meeting, or at any special meeting in lieu of the annual meeting, the shareholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. The notice of the meeting shall be in writing and signed by the President or a Vice President or the Secretary or an Assistant Secretary. Such notice shall state the purpose or purposes for which the meeting is called and the time when and the place within or without the State where such meeting is to be held, and a copy thereof shall be served, either personally or by mail upon each shareholder of record entitled to vote at such meeting, and upon each shareholder of record, who, by reason of any action proposed at such meeting, would be entitled to have his stock appraised if such action were taken, not less than ten or more than fifty days before the meeting. If mailed, it shall be directed to a shareholder at his address as it appears on the stock book unless he shall have filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request. 2.03 Special Meetings. Special meetings of the shareholders may be called at any time by the Chairman of the Board, by the President and by the President or the Secretary at the request in writing of either (a) a majority of the Board of Directors, or (b) shareholders owning a majority in amount of the shares issued and outstanding. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at a special meeting shall be confined to the purposes stated in the notice. 2.04 List of Shareholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, or cause to be prepared and made, at least ten days before every meeting of shareholders, a complete list, based upon the record date for such meeting determined pursuant to Section 6.8, of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if such place shall not be so specified, at the place where said meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. The stock ledger shall be the only evidence as to who are the shareholders entitled (i) to examine the stock ledger, the list of shareholders entitled to vote at any meeting, or the books 2 of the Corporation, or (ii) to vote in person or by proxy at any meeting of shareholders. 2.05 Notice of Meetings. Written notice of each annual and special meeting of shareholders, other than any meeting the giving of notice of which is otherwise prescribed by law, stating the place, date and hour of the meeting, and, in the case of a special meeting, indicating the purpose or purposes thereof and that it is being issued by or at the direction of the person or persons calling the meeting, shall be delivered or mailed in writing at least ten but not more than fifty days before such meeting, to each shareholder required or permitted to take any action or entitled to vote thereat. If mailed, such notice shall be deposited in the United States mail, postage prepaid, directed to such shareholder at his address as the same appears on the records of the Corporation. An affidavit of the Secretary, an Assistant Secretary or the transfer agent of the Corporation that notice has been given by mail shall be evidence of the facts stated therein. 2.06 Adjourned Meetings and Notice Thereof. Any meeting of shareholders may be adjourned to another time or place, and the Corporation may transact at any adjourned meeting any business which might have been transacted at the original meeting. Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless (a) any adjournment or series of adjournments cause the original meeting to be adjourned for more than thirty days after the date originally fixed therefor, or (b) a new record date is fixed for the adjourned meeting. If notice of any adjourned meeting is given, such notice shall be given to each shareholder of record entitled to vote at the adjourned meeting in the manner prescribed in Section 2.5 for giving of notice of meetings. 2.07 Quorum. At any meeting of shareholders, except as otherwise expressly required by law, or by the Certificate of Incorporation, the holders of record of at least a majority of the outstanding Capital Shares entitled to vote or act at such meetings shall be present or represented by proxy in order to constitute a quorum for the transaction of any business, but less than a quorum shall have power to adjourn any meeting unless a quorum shall be present. When a quorum is once present to organize a meeting, the quorum cannot be destroyed by the subsequent withdrawal or revocation of the proxy of any shareholder. Capital shares owned by the Corporation or by another corporation, if a majority of its shares entitled to vote in the election of directors is held by the Corporation, shall not be counted for quorum purposes or entitled to vote. 3 2.08 Voting. At any meeting of shareholders each shareholder holding, as of the record date, shares entitled to be voted on any matter at such meeting shall have one vote on each such matter submitted to vote at such meeting for each such share held by such shareholder as of the record date as shown by the list of shareholders entitled to vote at the meeting, unless the Certificate of Incorporation provides for more or less than one vote for any share on any matter, in which case every reference to a required proportion of shares shall refer to the proportion of the votes of such shares. Each shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, provided that no proxy shall be voted or acted upon after eleven months from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is coupled with an interest, whether in the shares themselves or in the Corporation, sufficient in law to support an irrevocable power. 2.09 Waivers of Notice of Meetings. Notice of meeting need not be given to any shareholder who signs a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. 2.10 Action by Consent of Shareholders. Unless otherwise provided in the Certificate of Incorporation, whenever any action by the shareholders at a meeting thereof is required or permitted by law, the Certificate of Incorporation, or these By-Laws, such action may be taken without a meeting, without prior notice and without a vote if a consent in writing, setting forth the action so taken, shall be signed by the holders of all the outstanding shares entitled to vote thereon. 2.11 Proxies. Every shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act by written proxy (which may be in the form of a telegram or cable or its equivalent) given by the shareholder or the shareholder's agent. No proxy shall be valid for more than eleven months, unless a longer time is expressly provided in the proxy. Unless it is coupled with an interest or is otherwise irrevocable as provided in the Business Corporation Law, a proxy shall be revocable at will. The grant of a later proxy revokes any earlier proxy unless the earlier proxy is irrevocable. A proxy shall not 4 be revoked by the death or incapacity of the shareholder but shall continue in force until revoked by the personal representative or guardian of the shareholder. The presence at any shareholders' meeting of any shareholder who has given a proxy shall not revoke the proxy unless the shareholder files written notice of revocation with the Secretary of the meeting before the voting of that proxy or the voting of the shares subject to the proxy by written ballot. A person named in a proxy as the attorney or agent of a shareholder may, if the proxy so provides, substitute another person to act in his or her place, including any other person named as an attorney or agent in the same proxy. The substitution shall not be effective until an instrument effecting it is filed with the Secretary of the Corporation. 2.12 Voting of Pledged Shares. Any person who has pledged shares entitled to vote at an annual or special meeting of shareholders of this Corporation shall have the right to vote those shares until they have been transferred into the name of the pledgee or a nominee of the pledgee. 2.13 Voting of Redeemable Shares. If the Corporation issues redeemable shares, the holders of those shares shall not be entitled to vote on any matter on or after the date on which (a) written notice of redemption of the shares has been mailed to the holders of those shares, and (b) a sum sufficient to redeem the shares has been deposited with a bank or trust company with irrevocable authorization to pay the redemption price to the shareholders on the surrender of the share certificates. 2.14 Officers of Meetings. The Chairman of the Board shall preside at all meetings of the Board of Directors at which he or she is present. If the President is a member of the Board, the President shall preside at all meetings of the Board at which the Chairman of the Board is absent and the President is present. If the Chairman of the Board is absent and the President is either absent or not a member of the Board of Directors, the Executive Vice President (or, in the absence of the Executive Vice President, the most senior Vice President) present at the meeting, shall preside. The Secretary of the Corporation shall, if present, act as secretary at all meetings of shareholders. In the absence of the Secretary, any Assistant Secretary of the Corporation who is present may act as secretary of the meeting. If no Assistant Secretary is present, a temporary secretary for that particular meeting shall be designated by the presiding officer. 2.15 Order of Business. The order of business at all meetings of the shareholders, unless changed by a majority vote of the shares entitled to vote at the meeting, shall be as follows: (a) Call to order; 5 (b) Report on presence of quorum; (c) Reading or waiver of proof of mailing of notice of meeting and minutes of preceding meeting; (d) Designation of inspectors of election, if any; (e) Election of directors (if applicable); (f) Old business; (g) New business; (h) Reports of officers; and (i) Adjournment. 2.16 Use of Ballots. Elections of directors and other matters requiring shareholder approval need not be by ballot unless a shareholder requests a vote by ballot on a particular issue before the commencement of voting on that issue. 2.17 Inspectors. (a) Before any annual or special meeting of shareholders, the Board of Directors may appoint one or more inspectors to act as such at the meeting. (b) In connection with any annual or special meeting of shareholders, if inspectors are not appointed by the Board of Directors or if they fail to qualify, the presiding officer at the meeting may and, on the request of any shareholder entitled to vote at the meeting, shall appoint one or more individuals to act as inspectors at the meeting. (c) If an individual appointed as inspector fails to appear, qualify, or act as an inspector, the vacancy may be filled by the Board of Directors before the applicable meeting or at the meeting by the presiding officer at the meeting. (d) Before performing their duties, all inspectors shall sign an oath or affirmation to execute faithfully the duties of inspector with strict impartiality and according to the best of their abilities. (e) No person shall be elected a director at a meeting at which he or she has served as an inspector. ARTICLE III - BOARD OF DIRECTORS 6 3.01 General Powers. The property, business and affairs of the Corporation shall be managed by the Board of Directors. The Board of Directors may exercise all such powers of the Corporation and have such authority and do all such lawful acts and things as are permitted by law, the Certificate of Incorporation or these By-Laws. 3.02 Number of Directors. The Board of Directors of the Corporation shall consist of at least three and not more than seven members, provided, however, that when all of the issued and outstanding shares of the Corporation's capital stock are owned by less than three shareholders, the number of directors may be less than three but not less than the number of shareholders. Subject to the foregoing limitations, the number of directors constituting the entire Board of Directors, to serve until the next annual meeting of shareholders, shall be such number as shall be designated by resolution of the Board of Directors adopted prior to the annual meeting of shareholders. In the absence of such resolution, the number of directors to be elected at such annual meeting shall be the number last fixed by the directors, and if no such number ever shall have been fixed by the directors, the Board of Directors shall consist of three members. 3.03 Qualification. Directors must be at least eighteen years of age, but need not be shareholders of the Corporation. 3.04 Election. Except as otherwise provided by law, the Certificate of Incorporation, or these By-Laws, after the first meeting of the Corporation at which directors are elected, directors of the Corporation shall be elected in each year at the annual meeting of shareholders, or at a special meeting in lieu of the annual meeting called for such purpose, by a plurality of votes cast at such meeting. The voting on directors at any such meeting need not be written ballot. 3.05 Term. Each director shall hold office until the expiration of the term for which he is elected and until his successor has been elected and qualified, or until his prior resignation or removal. 3.06 Resignation and Removal. Any director may resign at any time upon written notice to the Board of Directors, the President or the Secretary. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice, and unless otherwise 7 specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any or all of the directors may be removed for cause by vote of the shareholders or by action of the Board of Directors. Directors may be removed without cause only by vote of the shareholders. 3.07 Vacancies. Vacancies in the Board of Directors (unless the vacancy be caused by the removal of a director without cause) and newly created directorships resulting from any increase in the authorized number of directors shall be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. A vacancy caused by the removal of a director without cause shall be filled by a vote of the holders of a majority of the shares entitled to vote for the election of directors. If one or more directors shall resign from the Board of Directors effective at a future date, a majority of the directors then in office, including those who have so resigned at a future date, shall have power to fill such vacancy or vacancies, the vote thereon to take effect and the vacancy to be filled when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section for the filling of other vacancies. Each director chosen to fill a vacancy on the Board of Directors shall hold office until the next annual election of directors and until his successor shall be elected and qualified. 3.08 Quorum and Voting. Unless the Certificate of Incorporation provides otherwise, at all meetings of the Board of Directors a majority of the total number of directors (but not less than one-third of the total number of directors) shall be present to constitute a quorum for the transaction of business. A director interested in a contract or transaction may be counted in determining the presence of a quorum at a meeting of the Board of Directors which authorizes the contract or transaction. In the absence of a quorum, a majority of the directors present may adjourn the meeting until a quorum shall be present. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the Certificate of Incorporation or these By-Laws shall require a vote of a greater number. 3.09 Regulations. The Board of Directors may adopt such rules and regulations for the conduct of the business and management of the Corporation, not inconsistent with law or the 8 Certificate of Incorporation or these By-Laws, as the Board of Directors may deem proper. The Board of Directors may hold its meetings and cause the books and records of the Corporation to be kept at such place or places within or without the State of New York as the Board of Directors may from time to time determine. The Corporation shall keep at its registered office in the State of New York a record containing the names and addresses of all shareholders of the Corporation, the number and class of shares held by each shareholder, and the dates when they respectively became the owners of record. A member of the Board of Directors shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or any committee of the Board of Directors or in relying in good faith upon other records of the Corporation. 3.10 Annual Meeting of Board of Directors. An annual meeting of the Board of Directors shall be called and held for the purpose of organization, election of officers and transaction of any other business. If such meeting is held promptly after and at the place specified for the annual meeting of shareholders, no notice of the annual meeting of the Board of Directors need by given. Otherwise such annual meeting shall be held at such time (not more than thirty days after the annual meeting of shareholders) and place as may be specified in a notice of the meeting. 3.11 Regular Meetings. Regular meetings of the Board of Directors shall be held at the time and place, within or without the State of New York, as shall from time to time be determined by the Board of Directors. After there has been such determination and notice thereof has been given to each member of the Board of Directors, no further notice shall be required for any such regular meeting. Except as otherwise provided by law, any business may be transacted at any regular meeting. 3.12 Special Meetings. Special meetings of the Board of Directors may, unless otherwise prescribed by law, be called from time to time by the Chairman of the Board or the President, and shall be called by the President or Secretary upon the written request of a majority of the whole Board of Directors directed to the President or the Secretary. Except as provided below, notice of any special meeting of the Board of Directors, stating the time when and place where such special meeting shall be held, shall be given to each director. 9 3.13 Notice of Meetings. Notice of any meeting of the Board of Directors shall be deemed to be duly given to a director (i) if mailed to such director, addressed to him at his address as it appears upon the books of the Corporation, or at the address last made known in writing to the Corporation by such director as the address to which such notices are to be sent, at least two days before the day on which such special meeting is to be held, or (ii) if sent to him at such address by telegram, mailgram, cable, overnight courier, e.g., Federal Express, radio or wireless not later than the day before the day on which such meeting is to be held, or (iii) if delivered to him personally or orally, by telephone or otherwise, not later than the day before the day on which such special meeting is to be held. Each notice shall state the time and place of the meeting. 3.14 Compensation of Directors. Directors shall or shall not be compensated for their services and reimbursed for their expenses as employees, officers, Directors, and members of Board committees in accordance with such reasonable policies as shall be established from time to time by the affirmative vote of a majority of Directors in office. The Board may, if it deems it appropriate, provide for no compensation, or for reduced or no additional compensation for Board members who are compensated employees of the Corporation. 3.15 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee. 3.16 Use of Communication Equipment. Unless the Certificate of Incorporation provides otherwise, where appropriate communication facilities are reasonably available, any or all of the members of the Board of Directors, or any committee, thereof may participate in part or in all of a meeting of the Board by means of conference telephone or by any other means of communication by which all persons participating in the meeting are able to hear each other. ARTICLE IV - COMMITTEES OF THE BOARD OF DIRECTORS 4.01 Establishment of Committees. The Board of Directors may designate an Executive Committee from among its members, consisting of three or more Directors, and may at any time designate additional committees including, but not limited 10 to, Audit, Finance, Nominating and/or Stock Option Committees, each of which shall consist of one or more Directors, by the affirmative vote of a majority of the entire Board. Subject to the limitations contained in Sections 4.02 and 4.13 below, the Executive Committee shall have the maximum authority permitted by law in effect at the time of the exercise of that authority. Each additional committee shall have the authority, not exceeding the authority of the Executive Committee, specified by the Board in resolutions adopted by a majority of the entire Board. 4.02 Executive Committee. (a) If the Board of Directors designates an executive committee, meetings thereof shall be called by the Chairman of such committee, or by the Secretary, at the direction and upon the request of the Chairman of such committee, the President, or any two members of such committee. Notice of a meeting of the Executive Committee shall in each instance be given to each member of the Executive Committee at such member's last known business address, at least four hours before a meeting of such committee, either orally or in writing, delivered personally or by telephone or facsimile transmission. Such meetings shall be held at such time and place as shall from time to time be determined by the Executive Committee. At the request of any member of the Executive Committee during any meeting thereof, a special meeting of the full Board of Directors may be called and/or a telephonic conference call shall be placed in order that the full Board of Directors may be informally present at such meeting, and in such event the effectiveness of any action taken by the Executive Committee at such meeting shall be contingent upon ratification thereof by the full Board of Directors. (b) The Executive Committee may adopt its own rules of procedure not inconsistent with these by-laws. The Executive Committee shall have and may exercise, except as otherwise specifically prohibited by the laws of the State of New York or limited by resolutions passed by a majority of the whole Board, such powers of the Board of Directors as can lawfully be delegated by the Board of Directors, subject to the limitations contained in the preceding Subsection. 4.03 Audit Committee. (a) If the Board of Directors designates a Stock Option Committee, such Committee shall be established and comprised solely of Directors independent of management of the Corporation and free from any relationships that might, in the opinion of the Board of Directors, be considered to be a conflict of interest. In addition, a majority of such Audit Committee shall be composed of independent Directors who were not formerly officers of the Corporation. 11 (b) Meetings of the Audit Committee may be called by any executive officer of the Corporation, any member of the Audit Committee or the partner in charge of the Corporation's accounts at the firm of independent public accountants of the Corporation (the "accountants"), in each case upon two days' notice to each of the other members of such Committee, either personally or by mail, telegram or telephone. Such meetings shall be held at such time and place as shall from time to time be determined by the Audit Committee. (c) The responsibilities of the Audit Committee shall be as follows: (i) To recommend to the Board of Directors for approval by the shareholders a firm of independent public accountants, hereinafter called the accountants, to audit the accounts of the Corporation, and such of its subsidiaries as the Audit Committee may recommend, for the year regarding which the accountants is appointed. (ii) To meet jointly and/or separately with the chief financial officer of the Corporation and the accountants before commencement of the audit (x) to discuss the evaluation by the accountants of the adequacy and effectiveness of the accounting procedures and internal controls of the Corporation and its subsidiaries, (y) to approve the overall scope of the audit to be made and the fees to be charged, and (z) to inquire regarding and discuss with the accountants recent Financial Accounting Standards Board, Securities and Exchange Commission or other regulatory agency pronouncements, if any, which might affect the Corporation's financial statements. (iii) To meet jointly and/or separately with the chief financial officer and the accountants at the conclusion of the audit: (w) to review the audited financial statements of the Corporation, (x) to discuss the results of the audit, (y) to discuss any significant recommendations by the accountants of improvement of accounting systems and controls of the Corporation, and (z) to discuss the quality and depth of staffing in the accounting and financial departments of the Corporation. (iv) To meet and confer with such officers and employees of the Corporation as the Audit Committee shall deem appropriate in connection with carrying out the foregoing responsibilities. 4.04 Finance Committee. If the Board of Directors designates a Finance Committee, at least a majority of the members of such committee shall be neither officers nor otherwise employed by the Corporation. The Finance Committee shall have the power to fix from time to time the compensation of all principal officers 12 of the Corporation (other than the Chairman of the Board and the President, whose compensation shall be fixed from time to time by the Board) and shall otherwise exercise such powers as may be specifically delegated to it by the Board and act upon such matters as may be referred to it from time to time for study and recommendation by the Board or the President. 4.05 Stock Option Committee. If the Board of Directors designates a Stock Option Committee, at least a majority of the members of such committee shall be neither officers nor otherwise employed by the Corporation. Such Committee shall have the power to grant options under any stock option plan of the Corporation which by its terms is administered by a Stock Option Committee and shall be authorized to take any and all action necessary to be taken by a Stock Option Committee pursuant to the terms of any stock option plan adopted by the Board of Directors. The Stock Option Committee shall also have such other powers with respect to stock options as may be delegated by the Board of Directors. 4.06 Nominating Committee. If the Board of Directors designates a Nominating Committee, at least a majority of the members of such committee shall be neither officers nor otherwise employed by the Corporation. Such Committee shall review and make recommendations to the Board with respect to candidates for Directors of the Corporation and any of its subsidiaries, and to review assignments of Directors to committees of the Board. 4.07 Presiding Officer and Secretary. If the President is a member of any committee, the President shall serve as the chairperson of the committee. If the President is not a member of a committee, then the committee may choose one of its members to act as chairperson, unless the Board designates a chairperson. Each committee shall from time to time designate a secretary of the committee who shall keep a record of its proceedings. 4.08 Vacancies. Vacancies in the membership of any committee may be filled by the Board, pursuant to a resolution adopted by a majority of the entire Board, for the unexpired term of the member whose death, resignation, removal, or disability caused the vacancy. 4.09 Meetings. Each committee shall adopt its own rules of procedure. Each committee shall meet at whatever times it may determine by resolution, and shall also meet whenever called together by the Board. Members of committees may attend meetings through the medium of communications equipment, in the same manner as members of the Board; any committee may act by unanimous written consent instead of a meeting, in the same manner as the Board. Written consents submitted by all of the members of a committee shall have the same effect as a unanimous vote of the committee for all purposes. 13 4.10 Notice of Meetings. If a committee establishes regular meeting dates, it shall not be necessary to give notice of a regular meeting. Notice of every special meeting shall be given in the manner and within the time periods specified in these by-laws with respect to notices of special meetings of the Board of Directors. 4.11 Quorum; Voting. Except as otherwise provided by the certificate of incorporation, each Director shall have one vote at a meeting of a Board committee, and the participation of the Directors with a majority of the votes of the committee shall constitute a quorum for the transaction of business. A quorum at any meeting of any committee shall be a majority of the entire committee, except that if any committee consists of only one member, then that one Director constitutes a quorum. Every act or decision by a majority of the Directors present at a duly held committee meeting at which a quorum is present shall be regarded as the act of the committee. 4.12 Reports. Actions taken at a meeting of any committee shall be reported to the Board at its next meeting, except that when the meeting of the Board is held within two days after a committee meeting, the report may be made at the second Board meeting following the committee meeting. 4.13 Limitations on Powers. No committee of the Board shall have authority to do any of the following: (a) Make, alter, or repeal any by-law of the Corporation; (b) Elect or appoint any Director, or remove any officer or Director; (c) Submit to the shareholders any action that requires their approval; or (d) Amend or repeal any resolution adopted by the Board that by its terms is amendable or repealable only by the Board. 4.14 Powers of the Board. By resolution adopted by a majority of the entire Board, the Board shall have the power to: (a) Appoint one or more Directors to serve as alternate members of any committee and to act in the absence or disability of members of any committee with all the powers of the absent or disabled members; (b) Abolish any committee at its pleasure; and 14 (c) Remove any Director from membership on any committee at any time, with or without cause. ARTICLE V - OFFICERS 5.01 Election. The officers of the Corporation shall consist of a President, a Treasurer, a Secretary, and any other officers, including without limitation one Executive Vice President, one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Treasurers, and one or more Assistant Secretaries, as the Board deems necessary. All officers shall be elected by the Board of Directors. The President, Treasurer, Secretary, and any other officers that the Board considers appropriate shall be elected at the regular Board meeting immediately following the annual meeting of shareholders. Any two or more offices may be held by the same person; provided, however, that no officer shall be authorized to verify any instrument in more than one capacity if the instrument is required by law to be executed, acknowledged, or verified by two or more offices. 5.02 Additional Offices. The Board of Directors may from time to time elect any other officers that it deems necessary, who shall hold their offices for the terms and have the powers and duties prescribed by the Board. 5.03 Election and Term of Office. Each officer shall hold office from the date elected until the next annual election of officers, and until a successor has been elected unless the officer has previously resigned or been removed. All officers of the Corporation shall hold office at the pleasure of the Board of Directors. 5.04 Vacancies. Any vacancy in the offices of President, Treasurer, and Secretary shall be filled promptly by the Board. Any vacancy in any other office may be filled by the Board at its discretion. 5.05 Removal, Suspension and Resignation. (a) Any officer elected by the Board may be removed by the Board either with or without cause. Any officer elected by the shareholders may be removed, with or without cause, only by the shareholders. However, the Board may suspend for cause the authority of an officer appointed by the shareholders pending shareholder action. The removal or suspension of an officer shall be without prejudice to any contract rights that the officer may have. Election of an officer shall not, in and of itself, create contract rights. 15 (b) Any officer may resign at any time by giving written notice to the Board or to the President. The resignation will be effective on receipt, or at any later time specified in the resignation. Unless otherwise specified in the resignation, its acceptance is not necessary to make it effective. 5.06 Powers and Duties. The officers of the Corporation shall have the responsibilities set forth in these by-laws. The officers may have additional responsibilities as determined by the Board of Directors, the Executive Committee (if any) and, in the case of all officers other than the President, the President, provided that any additional responsibilities are not inconsistent with the provisions of these by-laws. Without limiting the foregoing, the officers shall have the following duties and responsibilities: (a) President. The President shall be the chief executive officer of the Corporation and, as such, shall have general supervision over the business and affairs of the Corporation, subject to the control of the Board of Directors. The President shall be a member ex officio of each standing committee to which he or she is not personally appointed. Subject to the control of the Board of Directors, the President may enter into any contract or execute and deliver any instruments on behalf of the Corporation. The President, if the Chairman of the Board shall be absent, shall preside at all meetings of the shareholders and, if the President is also a Director, he shall preside, in the absence of the Chairman of the Board, at all meetings of the Board of Directors that he or she attends. In general, the President shall perform all duties incident to the office of the President, and any other duties that may be assigned by the Board of Directors. (b) Vice President. In the order of their seniority unless otherwise determined by the Board of Directors, the Executive Vice President (if any) shall perform the functions of the President in the absence or disability of the President. In addition, they shall perform all other functions prescribed by the President or the Board of Directors. In the order of their seniority unless otherwise determined by the Board of Directors, the Vice Presidents (if any) shall perform the functions of the President in the absence or disability of the President and the Executive Vice President (if any). They shall perform all other duties and have whatever other powers prescribed by the President or the Board of Directors. (c) Treasurer. Unless a Vice President shall be appointed the Chief Financial Officer of the Corporation, the Treasurer shall be the Chief Financial Officer. He or she shall 16 have charge and custody of, and be responsible for, all funds and securities of the Corporation. The Treasurer shall deposit all funds in the name of the Corporation in the institutions selected by the Board of Directors. The Treasurer shall keep or cause to be kept books of account on behalf of the Corporation and shall make these books available to any of the Directors of the Corporation during business hours at the office of the Corporation where the books and records are kept. In general, the Treasurer shall perform all the duties incident to the office of the Treasurer and any other duties as may be assigned by the President or the Board of Directors. (d) Assistant Treasurer. Assistant Treasurers shall perform all of the duties and responsibilities of the Treasurer whenever the Treasurer is unavailable to perform the duties of the office, and shall perform all other duties as may be assigned to them by the Board of Directors, the President, or the Treasurer. (e) Secretary. The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the shareholders and shall keep the minutes of those meetings in a book or books to be provided for that purpose. The Secretary shall cause notices of meetings to be given in accordance with these by-laws. In general, the Secretary shall perform all the duties incident to the office of the Secretary and any other duties as may be assigned by the President or the Board of Directors. (f) Assistant Secretaries. Assistant Secretaries shall perform all of the duties and responsibilities of the Secretary whenever the Secretary is unavailable to perform the duties of the office, and shall perform all other duties and exercise all other powers as may be assigned to them by the Board of Directors, the President, or the Secretary. 5.07 Delegation of Duties of Officers. The Board of Directors may delegate the duties and powers of any officer of the Corporation to any other officer or to any director for a specified period of time for any reason that the Board of Directors may deem sufficient. 5.08 Bond. The Board of Directors shall have power, to the extent permitted by law, to require any officer, agent or employee of the Corporation to give bond for the faithful discharge of his duties in such form and with such surety or sureties as the Board of Directors may determine. ARTICLE VI - CAPITAL SHARES 17 6.01 Issuance of Certificates for Shares. Each shareholder of the Corporation shall be entitled to a certificate or certificates in such form as is prescribed by law and as shall be approved by the Board of Directors, certifying the number of capital shares of the Corporation owned by such shareholder. 6.02 Signatures on Share Certificates. Certificates for capital shares of the Corporation shall be signed by, or in the name of the Corporation by, the Chairman of the Board, the President or a Vice President and by the Secretary, the Treasurer, an Assistant Secretary or an Assistant Treasurer and shall bear the corporate seal of the Corporation or a printed or engraved facsimile thereof. If any such certificates are countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such signer were such officer, transfer agent or registrar at the date of issue. 6.03 Stock Ledger. A record of all certificates for capital shares issued by the Corporation shall be kept by the Secretary or any other officer, employee or agent designated by the Board of Directors. Such record shall show the name and address of the person, firm or corporation in which certificates for capital shares are registered, the number of shares represented by each such certificate, the date of each such certificate, and in case of certificates which have been cancelled, the date of cancellation thereof. The Corporation shall be entitled to treat the holder of record of capital shares as shown on the stock ledger as the owner thereof and as the person entitled to receive dividends thereon, to vote such shares and to receive notice of meetings, and for all other purposes. The Corporation shall not be bound to recognize any equitable or other claim to or interest in any capital share on the part of any other person whether or not the Corporation shall have express or other notice thereof. 6.04 Regulations Relating to Transfer. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with law, the Certificate of Incorporation or these By-Laws, concerning issuance, transfer and 18 registration of certificates for capital shares of the Corporation. The Board of Directors may appoint, or authorize any principal officer to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars and may require all certificates for capital shares to bear the signature or signatures of any of them. 6.05 Transfers. Transfer of capital shares shall be made on the books of the Corporation only upon delivery to the Corporation or its transfer agent of (i) a written direction of the registered holder named in the certificate or such holder's attorney lawfully constituted in writing, (ii) the certificate for the capital shares being transferred, and (iii) a written assignment of the capital shares evidenced thereby. 6.06 Cancellation. Each certificate for capital shares surrendered to the Corporation for exchange or transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificate (other than pursuant to Section 6.7) until such existing certificate shall have been cancelled. 6.07 Lost, Destroyed, Stolen, and Mutilated Certificates. In the event that any certificate for capital shares of the Corporation shall be mutilated the Corporation shall issue a new certificate in place of such mutilated certificate. In case any such certificate shall be lost, stolen, or destroyed the Corporation may, in the discretion of the Board of Directors or a committee designated thereby with power so to act, issue a new certificate for capital shares in the place of any such lost, stolen or destroyed certificate. The applicant for any substituted certificate or certificates shall surrender any mutilated certificate or, in the case of any lost, stolen or destroyed certificate, furnish satisfactory proof of such loss, theft or destruction of such certificate and of the ownership thereof. The Board of Directors or such committee may, in its discretion, require the owner of a lost, stolen or destroyed certificate, or his representatives, to furnish to the Corporation a bond with an acceptable surety or sureties and in such sum as will be sufficient to indemnify the Corporation against any claim that may be made against it on account of the lost, stolen or destroyed certificate or the issuance of such new certificate. A new certificate may be issued without requiring a bond when, in the judgment of the Board of Directors, it is proper to do so. 6.08 Fixing of Record Dates. (a) The Board of Directors may fix, in advance, a record date, which shall not be 19 more than fifty nor less than ten days before the date of any meeting of shareholders, nor more than fifty days prior to any other action, for the purpose of determining shareholders entitled to notice of or to vote at such meeting of shareholders or any adjournment thereof, or to express consent or dissent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action. (b) If no record date is fixed by the Board of Directors: (i) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the date next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (ii) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution or consents to the action relating thereto. (c) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VII - DIVIDENDS Subject to the provisions of the certificate of incorporation and to applicable law, dividends on the outstanding shares of the Corporation may be declared in such amounts and at such time or times as the Board of Directors may determine. Before payment of any dividend, there may be set aside out of the net profits of the Corporation available for dividends such sum or sums as the Board of Directors from time to time in its absolute discretion deems proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may modify or abolish any such reserve. ARTICLE VIII - INDEMNIFICATION 20 8.01 Indemnification. (a) The Corporation shall, to the full extent permitted by applicable law, indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the Corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other Corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the Corporation served in any capacity at the request of the Corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the Corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses,including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the Corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such director or officer did not act, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the Corporation or that he had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall, to the full extent permitted by applicable law, indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense or settlement of such action, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the Corporation, except that no indemnification 21 under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. Any indemnification by the Corporation pursuant hereto shall only be made in the manner and to the extent authorized by applicable law, and any such indemnification shall not be deemed exclusive of any other rights to which those seeking indemnification may otherwise be entitled under the applicable laws. 8.02 Insurance for Indemnification of Directors and Officers. The Corporation may purchase and maintain insurance: (a) To indemnify the Corporation for any obligation which it incurs as a result of the indemnification of directors and officers under the provisions of this Article VIII, and (b) To indemnify directors and officers in instances in which they may be indemnified by the Corporation under the provisions of this Article VIII, and (c) To indemnify directors and officers in instances in which they may not otherwise be indemnified by the Corporation under the provisions of this Article VIII, provided the contract of insurance covering such directors and officers provides, in a manner acceptable to the Superintendent of Insurance of the State of New York, for a retention amount and for co-insurance. No insurance however, may provide for any payment, other than cost of defense, to or on behalf of any director or officer: (a) if a judgment or other final adjudication adverse to the insured director or officer establishes that his acts of active and deliberate dishonesty were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not 22 legally entitled, or (b) in relation to any risk the insurance of which is prohibited under the law. In the event that any expenses or other amounts are paid by or for the Corporation by way of indemnification, otherwise than by court order or action by the shareholders, the Corporation shall, not later than the next annual meeting of shareholders unless such meeting is held within three months from the date of such payment, and, in any event, within 15 months from the date of such payment, mail to all shareholders of record at the time entitled to vote for the election of directors a statement specifying the persons paid, the amounts paid, and the nature and status at the time of such payment of the litigation or threatened litigation. ARTICLE IX - MISCELLANEOUS PROVISIONS 9.01 Corporate Seal. The Corporation's seal shall be inscribed with the name of the Corporation, the year of its incorporation, and the words "New York." The seal may be used by causing it or a facsimile to be impressed or reproduced on a document or instrument, or affixed to a document or instrument. 9.02 Fiscal Year. Unless the Board of Directors, by resolution, fixes a different date of commencement of the Corporation's fiscal year, the fiscal year of the Corporation shall begin on the first day of April of each year. 9.03 Waiver of Notice. Whenever any notice is required to be given under any provision of law, the Certificate of Incorporation, or these By-Laws, a written waiver thereof, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 23 9.04 Execution of Instruments, Contracts, etc. All checks, drafts, bills of exchange, notes or other obligations or orders for the payment of money shall be signed in the name of the Corporation by such officer or officers or person or persons, as the Board of Directors may from time to time designate. Except as otherwise provided by law, the Board of Directors, any committee given specific authority in the premises by the Board of Directors, or any committee given authority to exercise generally the powers of the Board of Directors during the intervals between meetings of the Board of Directors, may authorize any officer, employee or agent, in the name of and on behalf of the Corporation, to enter into or execute and deliver deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. All applications, written instruments and papers required by any department of the United States Government or by any state, county, municipal or other governmental authority, may be executed in the name of the Corporation by any principal officer or subordinate officer of the Corporation, or, to the extent designated for such purpose from time to time by the Board of Directors, by an employee or agent of the Corporation. Such designation may contain the power to substitute, in the discretion of the person named, one or more other persons. ARTICLE X - AMENDMENTS; EMERGENCY BY-LAWS 10.1 By Shareholders. These By-Laws may be altered, amended, repealed or added to, or new By-Laws may be adopted by the affirmative vote of the holders of not less than a majority of the outstanding shares entitled to vote for the election of any director at an annual meeting or at a special meeting called for that purpose, provided, however, that a written notice shall have been sent to each shareholder of record entitled to vote at such meeting, in conformity with the requisites of Section 2.5 hereof, which notice shall state the alterations, amendments, additions or changes which are proposed to be made in such By-Laws. 10.2 By Directors. To the extent permitted by the Certificate of Incorporation, these By-Laws may be amended, added to, altered or repealed, or new By-laws may be adopted at any regular or special meeting of the Board of Directors by a resolution adopted by affirmative vote of a majority of the whole Board of Directors; provided, however, that: (a) any By-law adopted by the Board of Directors 24 may be altered, amended or repealed by majority vote of the shareholders entitled to vote for the election of directors; and (b) if any By-law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the by-law so adopted, amended or repealed, together with a concise statement of the changes made. 25 EX-3 5 EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PIONEER COMMERCIAL FUNDING CORP. Under Section 805 of the Business Corporation Law of the State of New York Pursuant to the provisions of Section 805 of the Business Corporation Law of the State of New York, the undersigned Elie Housman and Glenda Klein, the President and Secretary, respectively, of Pioneer Commercial Funding Corp. (the "Corporation"), hereby certify that: 1. The name of the Corporation is Pioneer Commercial Funding Corp. 2. The Certificate of Incorporation of the Corporation was filed by the Secretary of State of the State of New York on March 8, 1994. 3. The Certificate of Incorporation, as heretofore amended, is further amended in accordance with Section 805(b)(11) to (a) change the 1,089,000 issued common shares, par value $.01 per share (the "Common Shares") to 825,000 issued Common Shares, at the rate of one for 825/1,089ths; and (b) change the 3,911,000 unissued Common Shares to 4,175,000 Common Shares at the rate of one for 4,175/3,911ths. 4. Paragraph FOURTH a) of the Certificate of Incorporation relating to the total authorized shares of capital stock which the Corporation is authorized to issue after the foregoing amendments shall remain unchanged, as follows: "FOURTH a) The corporation shall be authorized to issue the following shares:
Class Number of Shares Par Value ----- ---------------- --------- COMMON 5,000,000 $.01"
5. The foregoing amendment of the Certificate of Incorporation herein certified was authorized by vote of the Board of Directors, and was thereafter duly adopted by vote of a majority of the shares of Common Stock cast in favor thereof at an annual meeting of the shareholders held on April 24, 1996 at which a quorum was present and acting throughout. 6. The changes in the capitalization of the Corporation made pursuant hereto shall result in a decrease of stated capital from $10,890 to $8,250. IN WITNESS WHEREOF, this Certificate has been subscribed this 30th day of May, 1996 by Elie Housman and Glenda Klein, the President and Secretary, respectively, of the Corporation, who affirm that the statements made herein are true under the penalties of perjury. PIONEER COMMERCIAL FUNDING CORP. By:_________________________________ Elie Housman, President By:_________________________________ Glenda Klein, Secretary 2 EX-4 6 EXHIBIT 4.1 PIONEER COMMERCIAL FUNDING CORP. NON-QUALIFIED STOCK OPTION PLAN On August 1, 1994, the stockholders of the Company approved the adoption of the PCF Acquisition Corp. Non-Qualified Stock Option Plan (the "Plan"). In anticipation of the forthcoming merger of Pioneer Commercial Funding Corp. with and into the Company (the "Merger"), Sections R and S of the Plan are hereby modified, and the Plan, as so modified, is hereby redesignated as the Pioneer Commercial Funding Corp. Non-Qualified Stock Option Plan, and is hereby restated, as of November 4, 1994, as follows: A. Purpose and Scope The purpose of this Plan is to encourage stock ownership by employees and directors of, and independent consultants to, Pioneer Commercial Funding Corp., a New York corporation, and its subsidiaries (herein called the "Company"), to provide an incentive to such persons to develop, expand and improve the profits and prosperity of the Company, and to assist the Company in attracting key personnel and consultants through the grant of Options to purchase shares of the Company's Common Stock. B. Definitions Unless otherwise required by the context: 1. "Board" shall mean the Board of Directors of the Company. 2. "Committee" shall mean the Compensation Committee, which is appointed by the Board, and which shall be composed of at least two members of the Board each of whom shall be Disinterested Persons. 3. "Company" shall mean Pioneer Commercial Funding Corp. and its subsidiaries. 4. "Commission" shall mean the US Securities and Exchange Commission. 5. "Code" shall mean the Internal Revenue Code of 1986, as amended. 6. "Disinterested Person" shall mean a director who satisfies the conditions for qualification as a disinterested person set forth in Rule 16b-3(c)(2)(i) promulgated by the Commission under the Exchange Act. 7. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 8. "Independent Director" shall mean a director who is not an employee of the Company. 9. "Option" shall mean a right to purchase Stock, granted pursuant to the Plan. 10. "Option Price" shall mean the purchase price for Stock under an Option, as determined in Section F below. 11. "Participant" shall mean an employee of the Company, a director of the Company, a consultant to the Company, or any person to whom an Option is granted under the Plan. 12. "Plan" shall mean this Pioneer Commercial Funding Corp. Non-Qualified Stock Option Plan, as amended and/or modified from time to time hereafter. 13. "Securities Act" shall mean the Securities Act of 1933, as amended. 14. "Stock" shall mean the Common Stock of the Company, par value $.01. C. Stock to be Optioned Subject to the provisions of Section L of the Plan, the maximum number of shares of Stock that may be optioned or sold under the Plan is 151,515 shares. Such shares may be treasury, or authorized but unissued shares of, the Stock of the Company. In the event that any Options granted under the Plan shall terminate, expire or be surrendered to the Corporation for any reason without having been exercised in full, the shares represented thereby shall thereafter again be available for other awards under the Plan. D. Administration The Plan shall be administered by the Committee. Two members of the Committee shall constitute a quorum for the transaction of business. Subject to the express provisions and limitations of the Plan, and except as provided in Section R hereof, the Committee shall have full and final authority in its discretion to determine the individuals to whom awards shall be made, the time or times when they shall receive them, the exercise price of each Option, the period during which 2 and the terms and conditions under which each Option may be exercised, the number of shares to be subject to each Option, and all other terms and conditions relating to awards made under this Plan. Subject to the express provisions and limitations of the Plan, and except as provided in Section R hereof, the Committee shall also have full and final authority to interpret and implement the Plan and the respective Options issued pursuant to the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions not specified in or incorporated within the Plan to be included in the respective awards (which need not be uniform) and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any award in the manner and to the extent appropriate, and it shall be the sole and final judge in such circumstances. All actions or determinations of the Committee shall be by majority vote of its members and the determination of the Committee on the matters referred to in this Section shall be conclusive. The Committee shall report any action taken by it to the meeting of the Board of Directors next following such action. No member of the Committee shall be liable for any action or determination made by him in good faith. E. Eligibility The Committee may grant Options to any employee (including an employee who is a director or an officer), or any non-employee who is a director or an officer, or any non-employee director of the Company, or any consultant to the Company. Options may be awarded by the Committee at any time and from time to time to new Participants, or to then current Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Committee shall determine. Options granted at different times need not contain similar provisions. No person shall have any right to participate in the Plan unless selected by the Committee and then only to the extent determined by the Committee. In selecting the employees who may become Participants in the Plan, as well as in determining the amount, type and terms and conditions of each award made under the Plan, the Committee shall weigh such factors as it shall deem relevant to accomplish the purposes of the Plan, and all actions taken and determinations made by the Committee, in its sole discretion, shall be final and binding and not subject to review. 3 A Participant to whom an award has been made under the Plan may receive one or more additional awards if the Committee shall so determine. No person shall be eligible to receive any award if, at the time such award is made, such person owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company. F. Option Price The purchase price for Stock issuable upon exercise of each Option shall be at least 100 percent of the fair market value of the Stock on the date when the Option is granted (the "Grant Date"), but in no event less than the par value of the Stock. The fair market value of the Company's Stock shall be determined as follows: 1. If the Stock is traded on the either the Small-Cap Market or National Market System maintained by the National Association of Securities Dealers, Inc. ("NASD"), or is traded on a national securities exchange, the fair market value of the Stock shall be the closing sale price on the Grant Date as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or the national securities exchange on which the Stock is trading, as the case may be; or 2. If the Stock ceases to be traded on a national securities exchange, but trading in the Stock continues to be reported on NASDAQ, the fair market value of the Stock shall be the closing bid price on the Grant Date as reported by NASDAQ; or 3. If the Stock is not traded on a national securities exchange, and trading in the Stock is not reported on NASDAQ, the fair market value shall be determined by a reputable investment banking firm retained by the Board. G. Terms and Conditions of Options Except as provided in Section R hereof, Options granted pursuant to the Plan shall be authorized by the Committee and shall be evidenced by agreements which need not be uniform ("Option Agreements") in such form as the Committee, shall from time to time approve. Such Agreements shall comply with and be subject to the following terms and conditions: 1. Employment Agreement - The Committee may, in its discretion, include in any Option granted under the Plan to a Participant who is an employee of the Company a condition that the Participant shall agree to remain in the employ of, and/or to render services to, the Company for a period of time (specified in the Option Agreement) following the date the Option is granted. No such agreement 4 shall impose upon the Company, however, any obligation to employ the Participant for any period of time, except as otherwise agreed to by the Company. 2. Time and Method of Payment - The Option Price shall be paid in full in cash, by certified check or official bank check, at the time an Option is exercised under the Plan. If the Committee in its sole discretion so authorizes, payment may be made by exchange of shares of the Company's Common Stock previously owned by the optionee, having the same fair market value as determined in the manner set forth in Section F. Without payment by one of the methods described above, an exercise of any Option granted under the Plan shall be invalid and of no effect. Promptly after the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his or her ownership of the Stock issuable under such Option. A Participant shall have none of the rights of the stockholder until the Option is duly exercised, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such Option is duly exercised. 3. Number of Shares - Each Option shall state the total number of shares of Stock to which it pertains. 4. Option Period and Limitations on Exercise of Options - Except for Options granted pursuant to Section R hereof, the Committee shall determine the period of time during which an Option may be exercised, provided, however, that no Option may be exercised after the expiration of ten years from the date it is granted. Except for Options granted pursuant to Section R hereof, the Committee may, in its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option Agreement; provided, however, that no Option granted to an officer of the Company may be exercisable for a minimum of six months from the Grant Date. Options granted pursuant to Section R hereof will be exercisable in accordance with Section S hereof. Except as provided in the Option Agreement and in this Section G(4), an Option may be exercised in whole or in part at any time during its term. No Option may be exercised for a fractional share of Stock. 5. Securities Act Protective Provisions - Options may also include provisions (which need not be uniform) designed to prevent violations of the Securities Act and the rules and regulations thereunder upon the exercise of an option or the sale or other disposition of the shares of Common Stock purchased on exercise of an option. H. Termination of Employment Except as provided in Section I below, if an employee who is a Participant ceases to be employed by the Company, his or her Options unless 5 otherwise exercised, shall terminate as of the close of business on the 30th day following the termination of the Participant's employment with the Company, as long as such termination shall not be effected (i) by the Company (or the affected subsidiary) for cause, or (ii) by reason of the death of the employee; provided, however, that such Participant may exercise his or her Options during such 30 day period following such termination of employment only to the extent that he or she would otherwise be entitled to exercise such Options during such period; provided, further, however, that in no event shall any Option be exercisable more than ten (10) years from the date it was granted. Notwithstanding the foregoing, the Committee may cancel an Option during the 30 day period referred to in this section, if the Participant engages in employment or activities contrary, in the opinion of the Committee, to the best interest of the Company. The Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company, and, subject to applicable law, whether a leave of absence shall constitute a termination of employment. Any such determination of the Committee shall be final and conclusive. The foregoing provisions may be modified or waived by the Committee and do not, in any case, apply to any Participant who is not an employee of the Company. Except for Options granted pursuant to Section R hereof, the Committee will determine what, if any, provisions for earlier termination of the Option will be included in the Option Agreement issued to any non-employee. The Committee will determine who shall be deemed to be an employee of the Company for the purposes of this Section H and Section I below at the time the Option is granted. I. Rights in Event of Death If an employee who is a Participant dies while employed by the Company, or within three months after having retired with the consent of the Company, and without having fully exercised his or her Options, the Option theretofore granted to him or her may be exercised at any time prior to the first anniversary of such employee's death or the expiration date of the Option, whichever shall first occur, by the person or persons to whom such employee's rights under the Option shall pass by will or the laws of descent and distribution, but only to the extent that he or she was entitled to exercise the Option at the date of his or her death. The foregoing provisions may be modified or waived by the Committee and do not, in any case, apply to any Participant who is not an employee of the Company. Except for Options granted pursuant to Section R hereof, the Committee will determine what, if any, provisions concerning exercise of the Option upon the death of the holder will be included in the Option Agreement issued to any non-employee. J. No Obligations to Exercise Option 6 The granting of an Option shall impose no obligation upon the Participant to exercise such Option. K. Non-assignability Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime an Option shall be exercisable only by such Participant. L. Effect of Chance in Stock Subject to the Plan The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option, and the price per share, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (1) a subdivision or consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend on the Company's Common Stock, or (3) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person entitled under Section I to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Participant's Options in whole or in part, notwithstanding any provisions contained in the Plan or the Option Agreement to the contrary. M. Amendment and Termination Unless the Plan theretofore shall have been terminated as hereinafter provided, the Plan shall terminate on the tenth anniversary of the date of initial adoption of the Plan by the Company's shareholders, and no awards shall be made thereafter. The Committee at any time prior to that date may terminate the Plan, or make such changes in it and additions or amendments to it as the Committee shall deem advisable; provided, however, that except as provided in Section L hereof, any change in or addition or amendment to the Plan which shall (a) materially increase the benefits accruing to participants under the Plan; 7 (b) materially increase the number of shares of Common Stock which may be issued under the Plan; or (c) materially modify the requirements as to eligibility for participation under the Plan, shall be subject to approval by the shareholders of the Company within 12 months after its adoption or the same shall become null and void. No termination or amendment of the Plan may, without the consent of the holder of any Option adversely affect the rights of such holder. N. Agreement and Representation of Participants Upon the exercise of an Option at a time when there is not in effect a registration statement under the Securities Act relating to the Stock issuable upon exercise of the Option, the optionee shall provide the Company with such representations and warranties as may be required by the Company to the effect that the shares to be purchased pursuant to the Option are being acquired for investment and not with a view to the distribution thereof. Without limiting the Company's obligations with respect to outstanding Options, no Stock shall be purchased upon the exercise of any Option unless all applicable requirements of the Commission, and any other regulatory agencies having jurisdiction over the Company and of any stock exchanges upon which the Stock may be listed have been fully complied with. The Company shall use its best efforts to comply with all such regulations and appropriate provision may be made in the instruments evidencing Options to provide for suitable adjustments in the event that the Company is unable to comply with such regulations. O. Legend: Deposit of Certificates Until such time as the Stock issuable upon exercise of the Options granted under this Plan has been registered under the Securities Act, each certificate evidencing ownership of Stock issued upon exercise of an Option awarded under the Plan shall be registered in the name of the Participant and deposited by the Participant, together with a stock power endorsed in blank, with the Company, and shall bear the following or similar legend, and any other legend required by law: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions contained in the Pioneer Commercial Funding Corp. Non-Qualified Stock Option Plan and an agreement between the registered owner and PCF Acquisition Corp. Copies of such plan and agreement are on file in the offices of the Secretary of Pioneer Commercial Funding Corp." 8 Upon registration of such Stock under the Securities Act, the Company shall re-deliver to the Participant (or to his or her heir, designated beneficiary or legal representative) the certificate(s) and stock power(s) so deposited with it. P. Reservation of Shares of Stock The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by counsel for the Company for the lawful issuance and sale of its Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Stock as to which the requisite authority has not been obtained. Q. Effective Date of Plan The Plan shall be effective as of the date when it shall be adopted by the Company's stockholders, or on the effective date of the Merger, whichever shall last occur. R. Grant of Options to Independent Directors 1. On each of January 2, 1997, January 2, 2000 and January 2, 2003, each Independent Director shall automatically receive an Option to purchase 15,000 shares of Stock (the "Regular Independent Director Grant"). Notwithstanding the foregoing, should the date on which a Regular Independent Director Grant is scheduled to be awarded pursuant to the preceding sentence fall on a Saturday, Sunday or holiday, the Regular Independent Director Grant shall be awarded on the first business day immediately following such scheduled date. 2. On the date of each Independent Director's initial election to the Board, pursuant to a vote of the Company's stockholders or the Board or, if such initial election shall have occurred prior to the date of adoption of the Plan, then on said date of adoption, such newly-elected Independent Director shall automatically receive an Option to purchase a pro rata share of the shares of Stock underlying an Option granted pursuant to a Regular Independent Director Grant, which shall be equal to the product of 315.65 multiplied by the number of whole months remaining in the relevant three year period until the next Regular Independent Director Grant (the "Pro Rata Independent Director Grant"). S. Exercise Period of Options Granted to Independent Directors 9 Subject to the last paragraph of this Section S. each Option granted pursuant to the Plan shall vest and become exercisable as follows: 1. Those Options granted pursuant to a Regular Independent Director Grant shall vest and become exercisable as to 5,000 shares on the first anniversary of the Grant Date; as to 5,000 shares on the second anniversary of the Grant Date; and as to the remaining 5,000 shares on the third anniversary of the Grant Date. 2. Those Options granted pursuant to a Pro Rata Independent Director Grant shall vest and become exercisable as to that number of shares equal to the product of 315.65 multiplied by the number of whole months remaining in the first calendar year in which the Independent Director is elected initially to the Board on the January 1st following such Independent Director's initial election to the Board; and as to any remaining shares in accordance with the schedule for Options granted pursuant to a Regular Independent Director Grant as provided in Section S(1) hereof. Notwithstanding the foregoing, an Option shall not vest and become exercisable as to the relevant shares unless such Independent Director has served continuously on the Board during the year preceding the date on which such Options are scheduled to vest and become exercisable, or from the date such Independent Director joined the board should such Independent Director have joined the board during such preceding year; provided, however, that if an Independent Director does not fulfill such continuous service requirement due to such Independent Director's death or disability, all Options granted to such Independent Director pursuant to Section R hereof shall nonetheless vest and become exercisable as provided in this Section S. For purposes of this Section S "disability" shall mean a physical or mental condition which prevents an Independent Director from performing his duties as an Independent Director of the Company for a continuous six month period or for a total of six months during an 18 month period. Any Option which does not vest and become exercisable in accordance with this Section S shall terminate and be of no further force or effect. Subject to the provisions of Section L, no Option granted pursuant to this Section S shall remain exercisable for a period of more than ten years from the Grant Date. T. Withholding The Company or any subsidiary shall have the right to deduct from all salary or other compensatory payments made to a Participant any taxes required to be withheld under the applicable laws or regulations of any governmental authority, whether Federal, state or local and whether domestic or foreign with respect to (i) any Option granted; or (ii) any shares of Stock issued upon exercise of 10 Options granted, pursuant to the Plan. The person receiving such Option or shares shall be required to pay to the Company or such subsidiary the amount of any such taxes which the Company or such subsidiary is required to withhold with respect to such transaction. U. Cancellation and New Grant of Options The Committee shall have the authority to effect, at any time, and from time to time, with the consent of the affected holders, and pursuant to such terms or conditions as the Committee shall deem appropriate, the cancellation of any or all outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of Stock having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled Options. 11 EX-4 7 EXHIBIT 4.2 [FRONT] [LOGO] PC PIONEER COMMERCIAL FUNDING CORP. INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK COMMON STOCK CUSIP 723640 10 8 SEE REVERSE FOR CERTAIN DEFINITIONS THIS IS TO CERTIFY that is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE OF PIONEER COMMERCIAL FUNDING CORP., transferable on the books of the Corporation by the holder hereof in person or by duly authorized ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FASIMILE SIGNATURES OR ITS AUTHORIZED OFFICERS. DATED: SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER [CORPORATE SEAL] [BACK] PIONEER COMMERCIAL FUNDING CORP. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS TO STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations TEN COM - as tenants in common UNIF GIFT MIN ACT - .................Custodian................... (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Transfer to Minors JT TEN - as joint tenants with right Act .......................................... of survivorship and not as (State) tenants in common Additional abbreviations may also be used though not in the above list. For Value Received, ............................ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ....................................................................................... Please print or typewrite name and address including postal zip code of assignee ....................................................................................... ....................................................................................... .......................................................................................Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ....................................................................................... ....................................................................................... Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated:...................................... ..........................................
EX-4 8 EXHIBIT 4.7 PIONEER COMMERCIAL FUNDING CORP. COMMON STOCK PURCHASE OPTION Option (the "Option") dated as of the day of , 1996, from Pioneer Commercial Funding Corp., a New York corporation (the "Company"), to (the "Holder"), or her assigns (who, upon recordation of the transfer of ownership of this Option on the records of the Company maintained for such purpose, shall be deemed to be the "Holder" or the "Holders"). WHEREAS, pursuant to a certain agreement of even date herewith between the Company and the Holder (the "Agreement"), the Company desires to afford the Holder an opportunity to purchase shares of the Company's $.01 par value common stock (the "Common Stock"), subject to the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the Company hereby agrees as follows: 1. Grant of Option. The Company hereby grants to the Holder the right and option to purchase up to an aggregate of shares of Common Stock (the "Option Shares"), subject to adjustment as provided for herein. 2. Purchase Price. The purchase price of the shares of Common Stock covered by this Option shall be $ per share (the "Initial Exercise Price"), subject to adjustment (such price as so adjusted from time to time referred to herein as the "Purchase Price") as provided for herein. 3. Term of Option; Transferability. The term of this Option shall be for a period of years commencing on the date first above written (the "Exercise Period"). Subject to the conditions and limitations set forth in Section 9 hereof, the Holder shall be entitled to sell, assign or otherwise transfer ownership of this Option at any time during, but not after, the Exercise Period. 4. Reservation of Shares. At all times during the Exercise Period there shall be reserved for issuance and/or delivery upon exercise of this Option such number of shares of Common Stock as shall be required for issuance and delivery in connection therewith. 5. Exercise of Option. This Option may be exercised in whole at any time during the Exercise Period or in part from time to time during such period by executing and delivering a notice of exercise in the form attached hereto as Exhibit A. Such notice shall be accompanied by payment of the full purchase price of such shares by certified or bank check payable to the order of the Company. 6. Exchange, Transfer, Assignment or Loss of Option. This Option is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company for other options (collectively, the "Options") of different denominations entitling the Holder thereof to purchase in the aggregate, upon the same terms, and subject to the same conditions set forth, in this Option, the same number of shares of Common Stock purchasable hereunder. Subject to the provisions of Section 9 of this Option, upon surrender of this Option to the Company with the Assignment Form (annexed hereto as Exhibit B) duly executed, the Company, at its sole expense, shall execute and deliver a new Option in the name of the assignee named in such instrument of assignment and this Option shall promptly be cancelled. This Option may be divided or combined with other Options upon presentation hereof and thereof at the office of the Company together with a written notice specifying the names and denominations in which new Options are to be issued and signed by the Holder hereof. The term "Option" as used herein includes any Option into which this Option may be divided or exchanged. Upon receipt by the Company of an affidavit executed by the Holder attesting to the loss, theft, destruction or mutilation of this Option, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Option, if mutilated, the Company will execute and deliver a new Option of like tenor and date. 7. Rights before Issuance and Delivery of Shares. No Holder shall be entitled to the privileges of stock ownership in respect of any shares issued upon exercise of this Option, unless and until such shares of Common Stock have been issued to such Holder as fully paid and non-assessable shares. 8. Conditions Upon Issuance of Option Shares; Registration Rights. (a) Unregistered Shares. Neither this Option nor the Common Stock issuable upon exercise of this Option has been registered pursuant to a registration statement (a "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). Until such time as a Registration Statement pertaining to the Option Shares shall be declared effective by the Securities and Exchange Commission (the "Commission"), the Company shall not be required to issue any certificate for shares of Common Stock purchased upon the exercise of this Option unless, in connection with such exercise: (i) The Holder makes and delivers the following representations to the Company in writing: 2 a) The Holder is purchasing the Option Shares solely for her own account. 1) The Holder is an "accredited investor" (as that term is defined in rule 501 of Regulation D under the Act). The Holder acknowledges that it has been given, or the person who exercises full investment discretion to act on the Holder's behalf has been given, the opportunity to ask questions and receive satisfactory answers concerning the purchase of Option Shares upon exercise of this Option, the operations and financial condition of the Company, and the accuracy of the information provided by the Company to the Holder or the person who exercises full investment discretion to act in the Holder's behalf. 2) The Holder has no intention of distributing or reselling the Option Shares or any part thereof, or interest therein, in any transaction which would be in violation of the securities laws of the United States of America or any state securities laws, without prejudice, however, to the Holder's right at all times to sell or otherwise dispose of all or any part of the Option Shares pursuant to the above-mentioned registration thereof under the Securities Act and, if applicable, qualification under such state securities laws or under an exemption from such registration available under the Securities Act. 3) If the Holder desires to sell or otherwise dispose of all or any part of the Option Shares (other than pursuant to an effective Registration Statement under the Securities Act or a sale or other disposition made pursuant to the Commission's Rule 144), if requested by the Company, the Holder will deliver to the Company, an opinion of counsel, reasonably satisfactory in form and substance to the Company and its counsel, that such exemption is available. (ii) Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the certificates evidencing the Holder's ownership of the Option Shares (and all certificates for securities issued in exchange therefor or substitution thereof) shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR SUCH LAWS." (b) Piggyback Registration. If, at any time during the period of five years commencing on the date hereof, the Company proposes to register any of 3 its shares of capital stock under the Securities Act (other than in connection with an initial public offering or other offering in which the underwriter thereof objects to the registration of option shares, a merger or pursuant to Form S-8) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such Registration Statement, to the Holder of her intention to do so. If the Holder or, if there shall be more than one Holder, if the Holders holding a majority (as such term is defined in Section 8(f) hereof) of the Option Shares then issued and outstanding, notify the Company within twenty (20) days after receipt of any such notice of her or their desire to include any of the Option Shares in such proposed Registration Statement, the Company shall afford to each of such Holders the opportunity to have any such Option Shares registered under such Registration Statement. Notwithstanding the provisions of this Section 8(b), the Company shall have the right at any time after it shall have given written notice pursuant this Section (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. (c) Covenants of the Company with Respect to Registration. In connection with any registration of Option Shares under Section 8(b) hereof, the Company covenants and agrees as follows: (i) The Company shall use its best efforts to file a Registration Statement within sixty (60) days of receipt of any demand therefor, shall use its best efforts to have any Registration Statement declared effective at the earliest possible time, shall file such post-effective amendments thereto as may be necessary to maintain such effectiveness for a period of not less than nine months and shall furnish each Holder desiring to sell Option Shares, such number of prospectuses as shall reasonably be requested. (ii) The Company shall pay all costs (excluding fees and expenses of Holder(s) counsel and any underwriting or selling commissions), fees and expenses in connection with all Registration Statements filed pursuant to Section 8(b) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. (iii) The Company will take all necessary action which may be required in qualifying or registering the Option Shares included in a Registration Statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 4 (iv) In the event that the Company becomes aware of any untrue statement of a material fact, or of an omission to state a material fact that is required to be stated therein or that is necessary to make the statements contained therein not misleading in the light of the circumstances then existing, the Company will thereupon give notice to the Holder(s) of the Option Shares of such mistatement or omission. The Company also shall indemnify the Holder(s) of the Option Shares to be sold pursuant to any Registration Statement and each person, if any, who controls such Holder(s) within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such Registration Statement. (d) The Company's obligations to file a Registration Statement pursuant to Section 8(b) hereof with respect to any of the Option Shares are expressly conditioned, in each instance, upon the Company's receipt from the Holder(s) of the Option Shares to be offered for sale pursuant to such Registration Statement, severally, and not jointly, of written agreements to indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished in writing by or on behalf of such Holders for specific inclusion in such Registration Statement. (e) The Company shall as soon as practicable after the effective date of such Registration Statement, and in any event within 15 months thereafter, issue an earnings statement (which need not be audited) complying with Section 11(a) of the Securities Act and covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (f) For purposes of this Agreement, the term "majority" in reference to the Holder or Holders of this Option and the Option Shares purchasable hereunder, shall mean any combination of issued and outstanding Option Shares and rights to purchase Option Shares which if exercised, would at the time in question equal or exceed 10,001 Option Shares. 9. Transfer to Comply with the Securities Act. Neither this Option nor the Option Shares issuable upon exercise of this Option may be sold, assigned, transferred or otherwise disposed of except as follows: 5 (a) To a person who, in the opinion of counsel for the Company, is a person to whom this Option or Option Shares may legally be transferred without registration and without the delivery of a current prospectus under the Securities Act with respect thereto, and then only against receipt of an agreement of such person setting forth the representations specified in Section 8(a) hereof, and such person's agreement to comply with the provisions of this Section 9 with respect to any resale or other disposition of such securities which agreement shall be reasonably satisfactory in form and substance to the Company and its counsel; or (b) to any person upon delivery of a prospectus then meeting the requirements of the Securities Act relating to such securities and the offering thereof for such sale or disposition. 10. Adjustment of Purchase Price. The Purchase Price shall be subject to adjustment from time to time during the Exercise Period as follows: (a) If (and on each occasion that) the Company shall, at any time during the Exercise Period, issue or sell Additional Stock (as that term is defined in Section 10(b)(i) hereof) either without consideration or for a consideration per share less than the Purchase Price in effect immediately prior to the issue or sale of such Additional Stock, then, and in any such event, the Purchase Price in effect immediately prior to such issue or sale shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying such Purchase Price in effect immediately prior to such issue or sale, by a fraction: (i) the numerator of which shall be equal to the sum of (A) the total number of shares of Common Stock issued and outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the total number of shares of Common Stock which could be purchased at the aforesaid Purchase Price with the aggregate amount of the consideration (if any) received by the Company (or, without duplication, deemed to be received as provided in Sections 10(b)(iii) and 10(b)(iv) hereof) upon such issue or sale; and (ii) the denominator of which shall be equal to the total number of shares of Common Stock issued and outstanding at the close of business on the date of such issue or sale (including any such shares deemed to have been issued or sold as provided in Sections 10(b)(iii) and 10(b)(iv) hereof). (b) For the purposes of this Section 10 the following provisions shall also be applicable: (i) The term Additional Stock shall mean any Common Stock issued or sold, or deemed to have been issued or sold pursuant to Section 10(b)(iii) or Section 10(b)(iv) hereof, by the Company during the Exercise Period, other than Common Stock issued upon the exercise of this Option or upon exercise of any of the other Options, or upon the exercise of such other options as 6 may be issued by the Company to the Initial Holder, (in each case) in whole or in part. (ii) In determining the number of shares of Common Stock outstanding at any time, shares of Common Stock owned by the Company shall not be deemed to be outstanding. (iii) In case the Company, at any time during the Exercise Period, shall issue or sell any rights to subscribe for or to purchase, or grant any options for the purchase of, shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock ("Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share at which shares of Common Stock are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities, determined by dividing: 1) the total amount, if any, received or receivable by the Company as consideration for the issuance of such rights or the granting of such options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof; by 2) the maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of the maximum number of such Convertible Securities issuable on the exercise of such rights or options; shall be less than the Purchase Price in effect immediately prior to the issue of such rights or the grant of such options, then the maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the maximum number of such Convertible Securities issuable upon the exercise of such rights or options shall be deemed to be issued or sold for such price per share; provided, however, that upon the expiration of such rights or options, and, in the case of options to purchase Convertible Securities, upon the expiration of the right to convert or exchange such Convertible Securities, the currently applicable Purchase Price in effect immediately prior to such expiration shall forthwith be adjusted to such Purchase Price as would have obtained had the adjustments made upon the issuance of such rights or the granting of such options been made upon the basis of the issuance of only the number of shares of Common Stock actually issued on the exercise of such rights or options or on the conversion 7 or exchange of such Convertible Securities (or in the case of rights or options to purchase Convertible Securities, actually issued and at the time still issuable upon the conversion or exchange of the Convertible Securities actually issued), and upon the basis of only the consideration applicable thereto, and any shares issuable upon the exercise of such rights or options which have expired or upon the conversion or exchange of such Convertible Securities, the right to convert or exchange which has expired, shall not thereafter be deemed to be outstanding and the consideration applicable thereto shall not thereafter be deemed to have been received. If the said rights or options are issued or granted in conjunction with the sale of other securities of the Company, the part of the consideration allocable to the said rights and options, and the part of the consideration allocable to the said other securities, shall be determined in good faith by the Board of Directors of the Company. (iv) In case the Company, at any time during the Exercise Period, shall issue or sell any Convertible Securities, whether or not the rights to convert or exchange are immediately exercisable, and the price per share at which shares of Common Stock are deliverable upon such conversion or exchange, determined by dividing: 1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration (if any) payable to the Company upon such conversion or exchange; by 2) the maximum number of shares of Common Stock issuable as of the date of issue of such Convertible Securities to effect the conversion or exchange of all such Convertible Securities; shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then such issue or sale shall be deemed to be an issue or sale (as of the date of issue or sale of such Convertible Securities) of the maximum number of shares of Common Stock necessary to be issued as of that date to effect the conversion or exchange of all such Convertible Securities, and the gross amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration (if any) payable to the Company upon such conversion or exchange, shall be deemed to be the consideration actually received (as of the date of the issue or sale of such Convertible Securities) for the issue or sale of such Common Stock; provided, however, that upon the termination of the right to convert or to exchange such Convertible Securities for Common Stock, the Purchase Price shall forthwith be adjusted to such Purchase Price which would have obtained had the adjustments made upon the issuance of such Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon 8 the conversion or exchange thereof, and upon the basis of the consideration applicable only to the Convertible Securities so converted or exchanged, and no shares issuable upon the conversion or exchange of such Convertible Securities which were not actually so issued shall thereafter be deemed to be outstanding and the consideration applicable thereto shall not thereafter be deemed to have been received. No adjustment of the Purchase Price shall be made pursuant to the provisions of this Section 10(b)(iv) upon any issue or sale of Convertible Securities if such issue or sale has been made upon the exercise of any rights to subscribe for or to purchase, or any options to purchase, any such Convertible Securities for which an adjustment of the Purchase Price has been made pursuant to Section 10(b)(iii) hereof. (v) If the amount of consideration payable to the Company upon the exercise of any right or option to which Section 10(b)(iii) hereof is applicable or upon the conversion or exchange of any Convertible Securities referred to in Sections 10(b)(iii) or 10(b)(iv) hereof shall change at any time (other than under or by reason of provisions designed to protect against dilution), then, forthwith upon each such change becoming effective, all such rights or options or all such rights of conversion or exchange not theretofore exercised shall be deemed to have expired or terminated, as the case may be, and the Purchase Price shall forthwith be adjusted in accordance with the proviso contained in Section 10(b)(iii) or Section 10(b)(iv) hereof, as the case may be, and further adjusted as though such rights or options or Convertible Securities deemed expired or terminated were newly issued and convertible or exercisable upon the payment of such changed consideration. (vi) If the consideration payable to the Company upon the exercise of any right or option to which Section 10(b)(iii) hereof is applicable or upon the conversion or exchange of any Convertible Securities referred to in Section 10(b)(iii) or 10(b)(iv) hereof shall decrease at any time under or by reason of provisions with respect thereto designed to protect the Holders thereof against dilution, the Purchase Price which would apply if purchase rights hereunder were being exercised immediately after such event shall forthwith be decreased to the Purchase Price that would have obtained had the adjustments made upon the issuance of such right, option or Convertible Securities been made upon the basis of 1) the issuance of (and the total consideration received for) the shares of Common Stock theretofore delivered upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities, and 2) the issuance of (and the total minimum consideration thereafter receivable for) the maximum number of shares of Common Stock thereafter deliverable upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. (vii) In case any dividends on any class of stock (other than Common Stock) of the Company, payable in Common Stock or Convertible 9 Securities, shall be declared or paid by the Company, the Common Stock, or such Convertible Securities, as the case may be, so issued, shall be deemed to have been issued without consideration. (viii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received by the Company therefor shall be deemed to be the amount received by the Company therefor, before deducting therefrom all underwriting commissions, discounts or concessions and all finder's fees paid or allowed by the Company in connection therewith. (ix) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, then, in any such event, the amount of the consideration (other than cash) received by the Company shall be deemed to be the fair value of such consideration, as determined in good faith by the Board of Directors of the Company, before deducting all underwriting commissions, discounts or concessions and all finder's fees paid or allowed by the Company in connection therewith. (x) In case the Company shall take a record of the Holders of its Common Stock for the purpose of entitling them 1) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or 2) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the issue of such right to subscription or purchase, as the case may be. (c) If (and on each occasion that) the Company shall, at any time during the Exercise Period, (i) issue any shares of Common Stock as a dividend upon Common Stock, or (ii) issue any shares of Common Stock in subdivision of outstanding shares of Common Stock by reclassification or otherwise, or (iii) combine outstanding shares of Common Stock by reclassification or otherwise, the then current Purchase Price shall be adjusted to a price determined by dividing 1) the number of shares of Common Stock outstanding immediately prior to such dividend, subdivision or combination, multiplied by the then current Purchase Price, by 2) the total number of shares of Common Stock outstanding immediately after such issue, and the resulting quotient shall be the adjusted Purchase Price per share. (d) In case the Company shall, at any time during the Exercise Period, declare a dividend or make a distribution upon the Common Stock payable 10 otherwise than out of earnings or earned surplus and otherwise than in Common Stock or Convertible Securities, then thereafter the Holder hereof, upon the exercise of any of the rights represented by this Option, will be entitled to receive the number of Option Shares being purchased upon such exercise and, in addition and without further payment, the cash, stock or other securities and other property which the Holder hereof would have received by way of dividends and distributions (otherwise than out of such earnings or surplus or in Common Stock or Convertible Securities) if such Holder (i) had exercised this Option immediately prior to the declaration of such dividend or the making of such distribution so as to be entitled thereto, and (ii) had retained all dividends in stock or securities payable in respect of such Common Stock or in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend, as determined in good faith by the Board of Directors of the Company. 11. Adjustment of Number of Shares Purchasable Hereunder. Upon each adjustment of the Purchase Price pursuant to Section 10 hereof (in this Section 11 called the Latest Purchase Price Adjustment) the Holder of this Option shall thereafter (until another such adjustment) be entitled to purchase, at the adjusted Purchase Price per share resulting from such Latest Purchase Price Adjustment, the number of shares of Common Stock (calculated to the nearest whole share), obtained by (a) multiplying the number of shares purchasable hereunder (as adjusted from time to time as a result of all adjustments to the Purchase Price made prior to such Latest Purchase Price Adjustment) by the Purchase Price in effect immediately prior to such Latest Purchase Price Adjustment, and (b) dividing the product so obtained by the adjusted Purchase Price resulting from such Latest Purchase Price Adjustment. 12. Notice of Adjustment of Purchase Price. Upon any adjustment of the Purchase Price and/or an increase or decrease in the number of Option Shares purchasable upon the exercise of this Option, then, and in each such case, the Company, within thirty (30) days thereafter, shall give notice thereof in writing in accordance with Section 14 hereof to the Holder of this Option stating the adjusted Purchase Price and the increased or decreased number of shares of Common Stock issuable upon the exercise of this Option and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 13. Effect of Reorganization, Reclassification, Consolidation, Merger, etc. If, at any time during the Exercise Period, there should be any capital reorganization or reclassification of the capital stock of the Company (other than a subdivision or combination of shares provided for in Section 10(d) hereof) or any consolidation or merger of the Company with another corporation or any sale, 11 conveyance, lease or other transfer by the Company of all or substantially all of its property to any other corporation, the Holder of this Option shall thereafter, upon exercise of this Option, be entitled to receive the number of shares of Common Stock or other securities or property of the Company, or of the successor corporation resulting from such consolidation or merger, as the case may be, to which the Option Shares (and any other securities and property) of the Company, deliverable upon the exercise of this Option, would have been entitled upon such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer if this Option had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer; and, in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder of this Option to the end that the provisions set forth herein (including those relating to adjustments of the Purchase Price and the number of shares issuable upon the exercise of this Option) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof as if this Option had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer and the Holder hereof had carried out the terms of the exchange as provided for by such capital reorganization, reclassification of capital stock, consolidation or merger. The Company shall not effect any such capital reorganization, consolidation or merger unless, upon or prior to the consummation thereof, the successor corporation shall assume by written instrument, deemed by the Board of Directors of the Company to be satisfactory in form and substance, the obligation to deliver to the Holder hereof such shares of stock, securities, cash or property as such Holder shall be entitled to purchase in accordance with the foregoing provisions. 14. Notices. All communications and notices hereunder must be in writing, either delivered in hand or by next day overnight delivery, or sent by first-class mail, postage prepaid, or sent by telecopier, and, if to the Company, shall be addressed to it at 6660 Reseda Boulevard, Reseda, California 91335, or at such other address as the Company may hereafter designate in writing by notice to the Holder of this Option, and, if to such Holder, addressed to such Holder at the address of such Holder as shown on the books of the Company. 15. Sundays, Holidays, etc. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or a Sunday or shall be a legal holiday or a day on which banking institutions in the City of New York, New York are authorized or required by law to remain closed, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday, a Sunday or a legal holiday and not a day on 12 which banking institutions in the City of New York, New York are authorized or required by law to remain closed. 16. Type of Option; Laws Applicable to Construction. This Option is not to be treated as an incentive stock option under the Internal Revenue Code of 1986, as amended. This agreement shall be construed and enforced in accordance with the laws of the State of New York without regard to its choice of law principles. IN WITNESS WHEREOF, the Company has granted this Option duly executed by its officers thereunto duly authorized on the date specified above. PIONEER COMMERCIAL FUNDING CORP. By:_________________________________ Arthur H. Goldberg, Chairman and Chief Executive ATTEST: ___________________________________ 13 EXHIBIT A Pioneer Commercial Funding Corp. 6660 Reseda Boulevard Reseda, California 91335 Attention: Secretary Gentlemen: Pursuant to the terms of an Option dated ____________ __, 1994 (the "Option"), the undersigned hereby elects to exercise such Option to the extent of purchasing _________ shares at $_____ per share for an aggregate purchase price of $___________. Enclosed is payment of the purchase price by certified or bank check in the aggregate amount of the exercise price, payable to Pioneer Commercial Funding Corp. Please have the certificate representing said shares registered and forwarded to the undersigned, as follows: Name_____________________________________________________________ Street Address___________________________________________________ City__________________________State_______Zip Code_________ Very truly yours, Holder:_____________________________ By:_________________________________ (Signature) Name:_______________________________ Title:______________________________ DATE:________________________________ 14 EXHIBIT B FOR VALUE RECEIVED, _______________________________________hereby sells, assigns and transfers unto Name________________________________________________ (Please typewrite or print in block letters) Address_____________________________________________ Social Security or Employer Identification No.______ the right to purchase Common Stock represented by this Option to the extent of ___________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint _________________ Attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Holder:_____________________________ By:_________________________________ (Signature) Name:_______________________________ Title:______________________________ DATE:______________________________ Signature Guaranteed pioneer\documents\stock option 15 EX-4 9 EXHIBIT 4.8 PIONEER COMMERCIAL FUNDING CORP. COMMON STOCK PURCHASE OPTION Option (the "Option") dated as of the 16th day of August, 1996, from Pioneer Commercial Funding Corp., a New York corporation (the "Company"), to United Mizrahi Bank and Trust Company (the "Holder"), or its assigns (who, upon recordation of the transfer of ownership of this Option on the records of the Company maintained for such purpose, shall be deemed to be the "Holder" or the "Holders"). WHEREAS, pursuant to a certain agreement of even date herewith between the Company and the Holder (the "Agreement"), the Company desires to afford the Holder an opportunity to purchase shares of the Company's $.01 par value common stock (the "Common Stock"), subject to the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the Company hereby agrees as follows: 1. Grant of Option. The Company hereby grants to the Holder the right and option to purchase up to an aggregate of 41,271 shares of Common Stock (the "Option Shares"), subject to adjustment as provided for herein. 2. Purchase Price;. The purchase price of the shares of Common Stock covered by this Option shall be $5.50 per share (the "Initial Exercise Price"), subject to adjustment (such price as so adjusted from time to time referred to herein as the "Purchase Price") as provided for herein. 3. Term of Option; Vesting; Termination; Transferability. The term of this Option shall be for a period of five years commencing on the date first above written (the "Exercise Period"). Until the first anniversary of the date first above written, the Holder shall not be entitled to purchase any Option Shares hereunder. This Option shall vest at the rate of 10,318 Option Shares per annum on the first, second and third anniversaries of the date first above written. On the fourth anniversary of the date first above written, this Option shall vest with respect to 10,317 Option Shares. Anything herein contained to the contrary notwithstanding, if, at any time during the term of this Option, the Revolving Line of Credit and Security Agreement dated as of May 25, 1993 and executed by the Holder and the Company, as amended, modified and/or superseded from time to time thereafter, shall be terminated, canceled or not renewed for any reason, the term of this Option shall thereupon be deemed to have expired, and the then unexercised and/or unvested portion of this Option shall thereupon be canceled and shall be thereafter unenforceable. Subject to the conditions and limitations set forth in Section 9 hereof, the Holder shall be entitled to sell, assign or otherwise transfer ownership of this Option at any time during, but not after, the Exercise Period. 4. Reservation of Shares. At all times during the Exercise Period there shall be reserved for issuance and/or delivery upon exercise of this Option such number of shares of Common Stock as shall be required for issuance and delivery in connection therewith. 5. Exercise of Option. This Option may be exercised in whole at any time during the Exercise Period or in part from time to time during such period by executing and delivering a notice of exercise in the form attached hereto as Exhibit A. Such notice shall be accompanied by payment of the full purchase price of such shares by certified or bank check payable to the order of the Company. 6. Exchange, Transfer, Assignment or Loss of Option. This Option is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company for other options (collectively, the "Options") of different denominations entitling the Holder thereof to purchase in the aggregate, upon the same terms, and subject to the same conditions set forth, in this Option, the same number of shares of Common Stock purchasable hereunder. Subject to the provisions of Section 9 of this Option, upon surrender of this Option to the Company with the Assignment Form (annexed hereto as Exhibit B) duly executed, the Company, at its sole expense, shall execute and deliver a new Option in the name of the assignee named in such instrument of assignment and this Option shall promptly be cancelled. This Option may be divided or combined with other Options upon presentation hereof and thereof at the office of the Company together with a written notice specifying the names and denominations in which new Options are to be issued and signed by the Holder hereof. The term "Option" as used herein includes any Option into which this Option may be divided or exchanged. Upon receipt by the Company of an affidavit executed by the Holder attesting to the loss, theft, destruction or mutilation of this Option, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Option, if mutilated, the Company will execute and deliver a new Option of like tenor and date. 7. Rights before Issuance and Delivery of Shares. No Holder shall be entitled to the privileges of stock ownership in respect of any shares issued upon exercise of this Option, unless and until such shares of Common Stock have been issued to such Holder as fully paid and non-assessable shares. 8. Conditions Upon Issuance of Option Shares; Registration Rights. 2 (a) Unregistered Shares. Neither this Option nor the Common Stock issuable upon exercise of this Option has been registered pursuant to a registration statement (a "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). Until such time as a Registration Statement pertaining to the Option Shares shall be declared effective by the Securities and Exchange Commission (the "Commission"), the Company shall not be required to issue any certificate for shares of Common Stock purchased upon the exercise of this Option unless, in connection with such exercise: (i) The Holder makes and delivers the following representations to the Company in writing: a) The Holder is purchasing the Option Shares solely for its own account. 1) The Holder is an "accredited investor" (as that term is defined in rule 501 of Regulation D under the Act). The Holder acknowledges that it has been given, or the person who exercises full investment discretion to act on the Holder's behalf has been given, the opportunity to ask questions and receive satisfactory answers concerning the purchase of Option Shares upon exercise of this Option, the operations and financial condition of the Company, and the accuracy of the information provided by the Company to the Holder or the person who exercises full investment discretion to act in the Holder's behalf. 2) The Holder has no intention of distributing or reselling the Option Shares or any part thereof, or interest therein, in any transaction which would be in violation of the securities laws of the United States of America or any state securities laws, without prejudice, however, to the Holder's right at all times to sell or otherwise dispose of all or any part of the Option Shares pursuant to the above-mentioned registration thereof under the Securities Act and, if applicable, qualification under such state securities laws or under an exemption from such registration available under the Securities Act. 3) If the Holder desires to sell or otherwise dispose of all or any part of the Option Shares (other than pursuant to an effective Registration Statement under the Securities Act or a sale or other disposition made pursuant to the Commission's Rule 144), if requested by the Company, the Holder will deliver to the Company, an opinion of counsel, reasonably satisfactory in form and substance to the Company and its counsel, that such exemption is available. (ii) Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the certificates evidencing the Holder's ownership of the Option 3 Shares (and all certificates for securities issued in exchange therefor or substitution thereof) shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR SUCH LAWS." (b) Piggyback Registration. If, at any time during the period of five years commencing on the date hereof, the Company proposes to register any of its shares of capital stock under the Securities Act (other than in connection with an initial public offering or other offering in which the underwriter thereof objects to the registration of option shares, a merger or pursuant to Form S-8) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such Registration Statement, to the Holder of its intention to do so. If the Holder or, if there shall be more than one Holder, if the Holders holding a majority (as such term is defined in Section 8(f) hereof) of the Option Shares then issued and outstanding, notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any of the Option Shares in such proposed Registration Statement, the Company shall afford to each of such Holders the opportunity to have any such Option Shares registered under such Registration Statement. Notwithstanding the provisions of this Section 8(b), the Company shall have the right at any time after it shall have given written notice pursuant this Section (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. (c) Covenants of the Company with Respect to Registration. In connection with any registration of Option Shares under Section 8(b) hereof, the Company covenants and agrees as follows: (i) The Company shall use its best efforts to file a Registration Statement within sixty (60) days of receipt of any demand therefor, shall use its best efforts to have any Registration Statement declared effective at the earliest possible time, shall file such post-effective amendments thereto as may be necessary to maintain such effectiveness for a period of not less than nine months and shall furnish each Holder desiring to sell Option Shares, such number of prospectuses as shall reasonably be requested. 4 (ii) The Company shall pay all costs (excluding fees and expenses of Holder(s) counsel and any underwriting or selling commissions), fees and expenses in connection with all Registration Statements filed pursuant to Section 8(b) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. (iii) The Company will take all necessary action which may be required in qualifying or registering the Option Shares included in a Registration Statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (iv) In the event that the Company becomes aware of any untrue statement of a material fact, or of an omission to state a material fact that is required to be stated therein or that is necessary to make the statements contained therein not misleading in the light of the circumstances then existing, the Company will thereupon give notice to the Holder(s) of the Option Shares of such mistatement or omission. The Company also shall indemnify the Holder(s) of the Option Shares to be sold pursuant to any Registration Statement and each person, if any, who controls such Holder(s) within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such Registration Statement. (d) The Company's obligations to file a Registration Statement pursuant to Section 8(b) hereof with respect to any of the Option Shares are expressly conditioned, in each instance, upon the Company's receipt from the Holder(s) of the Option Shares to be offered for sale pursuant to such Registration Statement, severally, and not jointly, of written agreements to indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished in writing by or on behalf of such Holders for specific inclusion in such Registration Statement. (e) The Company shall as soon as practicable after the effective date of such Registration Statement, and in any event within 15 months thereafter, issue an earnings statement (which need not be audited) complying with 5 Section 11(a) of the Securities Act and covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (f) For purposes of this Agreement, the term "majority" in reference to the Holder or Holders of this Option and the Option Shares purchasable hereunder, shall mean any combination of issued and outstanding Option Shares and rights to purchase Option Shares which if exercised, would at the time in question equal or exceed 10,001 Option Shares 9. Transfer to Comply with the Securities Act. Neither this Option nor the Option Shares issuable upon exercise of this Option may be sold, assigned, transferred or otherwise disposed of except as follows: (a) To a person who, in the opinion of counsel for the Company, is a person to whom this Option or Option Shares may legally be transferred without registration and without the delivery of a current prospectus under the Securities Act with respect thereto, and then only against receipt of an agreement of such person setting forth the representations specified in Section 8(a) hereof, and such person's agreement to comply with the provisions of this Section 9 with respect to any resale or other disposition of such securities which agreement shall be reasonably satisfactory in form and substance to the Company and its counsel; or (b) to any person upon delivery of a prospectus then meeting the requirements of the Securities Act relating to such securities and the offering thereof for such sale or disposition. 10. Adjustment of Purchase Price. The Purchase Price shall be subject to adjustment from time to time during the Exercise Period as follows: (a) If (and on each occasion that) the Company shall, at any time during the Exercise Period, issue or sell Additional Stock (as that term is defined in Section 10(b)(i) hereof) either without consideration or for a consideration per share less than the Purchase Price in effect immediately prior to the issue or sale of such Additional Stock, then, and in any such event, the Purchase Price in effect immediately prior to such issue or sale shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying such Purchase Price in effect immediately prior to such issue or sale, by a fraction: (i) the numerator of which shall be equal to the sum of (A) the total number of shares of Common Stock issued and outstanding at the close of business on the day next preceding the date of such issue or sale, plus (B) the total number of shares of Common Stock which could be purchased at the aforesaid Purchase Price with the aggregate amount of the consideration (if any) received by the Company (or, without duplication, deemed to be received as provided in Sections 10(b)(iii) and 6 10(b)(iv) hereof) upon such issue or sale; and (ii) the denominator of which shall be equal to the total number of shares of Common Stock issued and outstanding at the close of business on the date of such issue or sale (including any such shares deemed to have been issued or sold as provided in Sections 10(b)(iii) and 10(b)(iv) hereof). (b) For the purposes of this Section 10 the following provisions shall also be applicable: (i) The term Additional Stock shall mean any Common Stock issued or sold, or deemed to have been issued or sold pursuant to Section 10(b)(iii) or Section 10(b)(iv) hereof, by the Company during the Exercise Period, other than Common Stock issued upon the exercise of this Option or upon exercise of any of the other Options, or upon the exercise of such other options as may be issued by the Company to the Initial Holder, (in each case) in whole or in part. (ii) In determining the number of shares of Common Stock outstanding at any time, shares of Common Stock owned by the Company shall not be deemed to be outstanding. (iii) In case the Company, at any time during the Exercise Period, shall issue or sell any rights to subscribe for or to purchase, or grant any options for the purchase of, shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock ("Convertible Securities"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share at which shares of Common Stock are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities, determined by dividing: 1) the total amount, if any, received or receivable by the Company as consideration for the issuance of such rights or the granting of such options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof; by 2) the maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of the maximum number of such Convertible Securities issuable on the exercise of such rights or options; 7 shall be less than the Purchase Price in effect immediately prior to the issue of such rights or the grant of such options, then the maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the maximum number of such Convertible Securities issuable upon the exercise of such rights or options shall be deemed to be issued or sold for such price per share; provided, however, that upon the expiration of such rights or options, and, in the case of options to purchase Convertible Securities, upon the expiration of the right to convert or exchange such Convertible Securities, the currently applicable Purchase Price in effect immediately prior to such expiration shall forthwith be adjusted to such Purchase Price as would have obtained had the adjustments made upon the issuance of such rights or the granting of such options been made upon the basis of the issuance of only the number of shares of Common Stock actually issued on the exercise of such rights or options or on the conversion or exchange of such Convertible Securities (or in the case of rights or options to purchase Convertible Securities, actually issued and at the time still issuable upon the conversion or exchange of the Convertible Securities actually issued), and upon the basis of only the consideration applicable thereto, and any shares issuable upon the exercise of such rights or options which have expired or upon the conversion or exchange of such Convertible Securities, the right to convert or exchange which has expired, shall not thereafter be deemed to be outstanding and the consideration applicable thereto shall not thereafter be deemed to have been received. If the said rights or options are issued or granted in conjunction with the sale of other securities of the Company, the part of the consideration allocable to the said rights and options, and the part of the consideration allocable to the said other securities, shall be determined in good faith by the Board of Directors of the Company. (iv) In case the Company, at any time during the Exercise Period, shall issue or sell any Convertible Securities, whether or not the rights to convert or exchange are immediately exercisable, and the price per share at which shares of Common Stock are deliverable upon such conversion or exchange, determined by dividing: 1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration (if any) payable to the Company upon such conversion or exchange; by 2) the maximum number of shares of Common Stock issuable as of the date of issue of such Convertible Securities to effect the conversion or exchange of all such Convertible Securities; shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then such issue or sale shall be deemed to be an issue or sale (as of the 8 date of issue or sale of such Convertible Securities) of the maximum number of shares of Common Stock necessary to be issued as of that date to effect the conversion or exchange of all such Convertible Securities, and the gross amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration (if any) payable to the Company upon such conversion or exchange, shall be deemed to be the consideration actually received (as of the date of the issue or sale of such Convertible Securities) for the issue or sale of such Common Stock; provided, however, that upon the termination of the right to convert or to exchange such Convertible Securities for Common Stock, the Purchase Price shall forthwith be adjusted to such Purchase Price which would have obtained had the adjustments made upon the issuance of such Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the conversion or exchange thereof, and upon the basis of the consideration applicable only to the Convertible Securities so converted or exchanged, and no shares issuable upon the conversion or exchange of such Convertible Securities which were not actually so issued shall thereafter be deemed to be outstanding and the consideration applicable thereto shall not thereafter be deemed to have been received. No adjustment of the Purchase Price shall be made pursuant to the provisions of this Section 10(b)(iv) upon any issue or sale of Convertible Securities if such issue or sale has been made upon the exercise of any rights to subscribe for or to purchase, or any options to purchase, any such Convertible Securities for which an adjustment of the Purchase Price has been made pursuant to Section 10(b)(iii) hereof. (v) If the amount of consideration payable to the Company upon the exercise of any right or option to which Section 10(b)(iii) hereof is applicable or upon the conversion or exchange of any Convertible Securities referred to in Sections 10(b)(iii) or 10(b)(iv) hereof shall change at any time (other than under or by reason of provisions designed to protect against dilution), then, forthwith upon each such change becoming effective, all such rights or options or all such rights of conversion or exchange not theretofore exercised shall be deemed to have expired or terminated, as the case may be, and the Purchase Price shall forthwith be adjusted in accordance with the proviso contained in Section 10(b)(iii) or Section 10(b)(iv) hereof, as the case may be, and further adjusted as though such rights or options or Convertible Securities deemed expired or terminated were newly issued and convertible or exercisable upon the payment of such changed consideration. (vi) If the consideration payable to the Company upon the exercise of any right or option to which Section 10(b)(iii) hereof is applicable or upon the conversion or exchange of any Convertible Securities referred to in Section 10(b)(iii) or 10(b)(iv) hereof shall decrease at any time under or by reason of provisions with respect thereto designed to protect the Holders thereof against 9 dilution, the Purchase Price which would apply if purchase rights hereunder were being exercised immediately after such event shall forthwith be decreased to the Purchase Price that would have obtained had the adjustments made upon the issuance of such right, option or Convertible Securities been made upon the basis of 1) the issuance of (and the total consideration received for) the shares of Common Stock theretofore delivered upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities, and 2) the issuance of (and the total minimum consideration thereafter receivable for) the maximum number of shares of Common Stock thereafter deliverable upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. (vii) In case any dividends on any class of stock (other than Common Stock) of the Company, payable in Common Stock or Convertible Securities, shall be declared or paid by the Company, the Common Stock, or such Convertible Securities, as the case may be, so issued, shall be deemed to have been issued without consideration. (viii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received by the Company therefor shall be deemed to be the amount received by the Company therefor, before deducting therefrom all underwriting commissions, discounts or concessions and all finder's fees paid or allowed by the Company in connection therewith. (ix) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, then, in any such event, the amount of the consideration (other than cash) received by the Company shall be deemed to be the fair value of such consideration, as determined in good faith by the Board of Directors of the Company, before deducting all underwriting commissions, discounts or concessions and all finder's fees paid or allowed by the Company in connection therewith. (x) In case the Company shall take a record of the Holders of its Common Stock for the purpose of entitling them 1) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or 2) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the issue of such right to subscription or purchase, as the case may be. 10 (c) If (and on each occasion that) the Company shall, at any time during the Exercise Period, (i) issue any shares of Common Stock as a dividend upon Common Stock, or (ii) issue any shares of Common Stock in subdivision of outstanding shares of Common Stock by reclassification or otherwise, or (iii) combine outstanding shares of Common Stock by reclassification or otherwise, the then current Purchase Price shall be adjusted to a price determined by dividing 1) the number of shares of Common Stock outstanding immediately prior to such dividend, subdivision or combination, multiplied by the then current Purchase Price, by 2) the total number of shares of Common Stock outstanding immediately after such issue, and the resulting quotient shall be the adjusted Purchase Price per share. (d) In case the Company shall, at any time during the Exercise Period, declare a dividend or make a distribution upon the Common Stock payable otherwise than out of earnings or earned surplus and otherwise than in Common Stock or Convertible Securities, then thereafter the Holder hereof, upon the exercise of any of the rights represented by this Option, will be entitled to receive the number of Option Shares being purchased upon such exercise and, in addition and without further payment, the cash, stock or other securities and other property which the Holder hereof would have received by way of dividends and distributions (otherwise than out of such earnings or surplus or in Common Stock or Convertible Securities) if such Holder (i) had exercised this Option immediately prior to the declaration of such dividend or the making of such distribution so as to be entitled thereto, and (ii) had retained all dividends in stock or securities payable in respect of such Common Stock or in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend, as determined in good faith by the Board of Directors of the Company. 11. Adjustment of Number of Shares Purchasable Hereunder. Upon each adjustment of the Purchase Price pursuant to Section 10 hereof (in this Section 11 called the Latest Purchase Price Adjustment) the Holder of this Option shall thereafter (until another such adjustment) be entitled to purchase, at the adjusted Purchase Price per share resulting from such Latest Purchase Price Adjustment, the number of shares of Common Stock (calculated to the nearest whole share), obtained by (a) multiplying the number of shares purchasable hereunder (as adjusted from time to time as a result of all adjustments to the Purchase Price made prior to such Latest Purchase Price Adjustment) by the Purchase Price in effect immediately prior to such Latest Purchase Price Adjustment, and (b) dividing the product so obtained by the adjusted Purchase Price resulting from such Latest Purchase Price Adjustment. 11 12. Notice of Adjustment of Purchase Price. Upon any adjustment of the Purchase Price and/or an increase or decrease in the number of Option Shares purchasable upon the exercise of this Option, then, and in each such case, the Company, within thirty (30) days thereafter, shall give notice thereof in writing in accordance with Section 14 hereof to the Holder of this Option stating the adjusted Purchase Price and the increased or decreased number of shares of Common Stock issuable upon the exercise of this Option and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 13. Effect of Reorganization, Reclassification, Consolidation, Merger, etc. If, at any time during the Exercise Period, there should be any capital reorganization or reclassification of the capital stock of the Company (other than a subdivision or combination of shares provided for in Section 10(d) hereof) or any consolidation or merger of the Company with another corporation or any sale, conveyance, lease or other transfer by the Company of all or substantially all of its property to any other corporation, the Holder of this Option shall thereafter, upon exercise of this Option, be entitled to receive the number of shares of Common Stock or other securities or property of the Company, or of the successor corporation resulting from such consolidation or merger, as the case may be, to which the Option Shares (and any other securities and property) of the Company, deliverable upon the exercise of this Option, would have been entitled upon such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer if this Option had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer; and, in any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder of this Option to the end that the provisions set forth herein (including those relating to adjustments of the Purchase Price and the number of shares issuable upon the exercise of this Option) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof as if this Option had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale or other transfer and the Holder hereof had carried out the terms of the exchange as provided for by such capital reorganization, reclassification of capital stock, consolidation or merger. The Company shall not effect any such capital reorganization, consolidation or merger unless, upon or prior to the consummation thereof, the successor corporation shall assume by written instrument, deemed by the Board of Directors of the Company to be satisfactory in form and substance, the obligation to deliver to the Holder hereof such shares of stock, securities, cash or property as such Holder shall be entitled to purchase in accordance with the foregoing provisions. 12 14. Notices. All communications and notices hereunder must be in writing, either delivered in hand or by next day overnight delivery, or sent by first-class mail, postage prepaid, or sent by telecopier, and, if to the Company, shall be addressed to it at 6660 Reseda Boulevard, Reseda, California 91335, or at such other address as the Company may hereafter designate in writing by notice to the Holder of this Option, and, if to such Holder, addressed to such Holder at the address of such Holder as shown on the books of the Company. 15. Sundays, Holidays, etc. If the last or appointed day for the taking of any action required or the expiration of any right granted herein shall be a Saturday or a Sunday or shall be a legal holiday or a day on which banking institutions in the City of New York, New York are authorized or required by law to remain closed, then such action may be taken or right may be exercised on the next succeeding day which is not a Saturday, a Sunday or a legal holiday and not a day on which banking institutions in the City of New York, New York are authorized or required by law to remain closed. 16. Type of Option; Laws Applicable to Construction. This Option is not to be treated as an incentive stock option under the Internal Revenue Code of 1986, as amended. This agreement shall be construed and enforced in accordance with the laws of the State of New York without regard to its choice of law principles. IN WITNESS WHEREOF, the Company has granted this Option duly executed by its officers thereunto duly authorized on the date specified above. PIONEER COMMERCIAL FUNDING CORP. By: _________________________________ Arthur H. Goldberg, Chairman and Chief Executive ATTEST: ____________________________________ 13 EXHIBIT A Pioneer Commercial Funding Corp. 6660 Reseda Boulevard Reseda, California 91335 Attention: Secretary Gentlemen: Pursuant to the terms of an Option dated ____________ __, 1996 (the "Option"), the undersigned hereby elects to exercise such Option to the extent of purchasing _________ shares at $_____ per share for an aggregate purchase price of $___________. Enclosed is payment of the purchase price by certified or bank check in the aggregate amount of the exercise price, payable to Pioneer Commercial Funding Corp. Please have the certificate representing said shares registered and forwarded to the undersigned, as follows: Name ____________________________________________________________ Street Address___________________________________________________ City__________________________ State___________ Zip Code_________ Very truly yours, Holder:____________________________ By:________________________________ (Signature) Name:______________________________ Title:_____________________________ _____________________________ DATE:_______________________________ 14 EXHIBIT B FOR VALUE RECEIVED,_______________________________________hereby sells, assigns and transfers unto Name ____________________________________________________________ (Please typewrite or print in block letters) Address __________________________________________________________ Social Security or Employer Identification No. ____________ the right to purchase Common Stock represented by this Option to the extent of ___________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint __________________ Attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Holder: ____________________________ By: ________________________________ (Signature) Name: ______________________________ Title:______________________________ DATE: ____________________________ Signature Guaranteed __________________________________ 15 EX-10 10 EXHIBIT 10.1 REVOLVING LINE OF CREDIT AND SECURITY AGREEMENT REVOLVING LINE OF CREDIT AND SECURITY AGREEMENT, entered into as of this 25th day of May 1993, by and between PIONEER COMMERCIAL FUNDING CORPORATION, a New York corporation (herein referred to as "Borrower"), and UMB Bank and Trust Company, a New York commercial bank (herein referred to as "Bank"). RECITALS Borrower desires to borrow, and the Bank desires to lend, under a secured revolving line of credit not to exceed at any one time outstanding, the principal amount of One Million Dollars ($1,000,000.00) for the first six (6) months of the term of the Line and to increase thereafter to Two Million Dollars ($2,000,000.00) for the purpose of funding a mortgage warehouse revolving line of credit provided there has been no Default or Event of Default as defined herein; and Bank is willing to extend credit to Borrower from time to time from the Effective Date of this Agreement to the Maturity Date in the amount hereinabove specified upon the representations and warranties and subject to the terms and provisions hereinafter set forth; NOW THEREFORE, in consideration of these Recitals and of the mutual covenants and conditions herein contained, the parties hereto agree as follows: SECTION I DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. The following terms, as used in this Agreement, shall have the following meanings, unless the context clearly indicates otherwise: "Advance(s)" means any amount of money drawn under the Revolving Line of Credit but shall be limited to an amount equal to two points below the percentage of the principal mortgage amount that is funded by the Borrower and shall be used for the purpose of purchasing a Mortgage originated by a pre-approved mortgage banking company. "Advance Maturity Date" means, for any Advance, the date which corresponds to the date for the Mortgage Take-out for such Advance. "Affiliate" means any person (i) which directly or indirectly controls, or is controlled by, or is under common control with, the Borrower or a Subsidiary; (ii) which directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of the Borrower or any Subsidiary; or (iii) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Borrower or the Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Revolving Line of Credit and Security Agreement, as amended, supplemented, or modified from time to time. "Business Day" means a day other than a Saturday, Sunday, legal holiday or day on which Bank is authorized to close in the State of New York. "Chapter 11 Case" means that certain matter known as In re PIONEER COMMERCIAL FUNDING CORPORATION a/k/a PCFC of California, Chapter 11 Case No. 30 B 20085 (HS) filed in the United States Bankruptcy Court for the Southern District of New York. "Collateral" means all property which is subject or is to be subject to the lien granted by the Security Agreement to be delivered to the Bank by the Borrower pursuant to this Agreement. "Commitment" means the Bank's obligation to fund the Line to the Borrower pursuant to Article II in the amount referred to therein. "Debt" means all items which, in accordance with GAAP, would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date Debt is to be determined and, in any event, shall include (without duplication) letters of credit and all obligations relating thereto, any liability secured by any mortgage, pledge, lien or security interest on property owned or acquired, whether or not such liability shall have been assumed, and guarantees, endorsements (other than for collection in the ordinary course of business} and other contingent obligations in respect of the obligations of others. When Debt is to be determined on a consolidated basis for two or more entities, obligations of one guaranteed by another shall not be counted twice. "Default" means the occurrence of any event specified in Section 7 regardless of whether or not any requirements for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Effective Date" means the entry date of an Order confirming the Plan of Reorganization in the Chapter 11 Case. 2 "ERISA" means the Employee Retirement Income Security Act of 1974, as the same is or may be amended, and the regulations and interpretations thereof. "Event of Default" means any act or occurrence specified as an Event of Default in Section 7 hereof provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "GAAP" means generally accepted accounting principles and practices in the United States, including principles of consolidation as consistently applied by Borrower and certified to by the firm of independent certified public accountants regularly employed as Borrower's auditors and approved by the Bank. "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), or preference, priority, or other security agreement or preferential arrangement, charge or encumbrance of any kind or nature whatsoever (including without limitation any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). "Line" means the Revolving Line of Credit. "Loan Documents" means this Agreement, the Notes, the financing statements covering the Collateral, and any and all other documents, instruments, certificates an agreements executed and/or delivered by Borrower in connection herewith, or any one, more, or all of the foregoing, as the context shall require. "Maturity Date" means fifteen (15) months from the date of confirmation of the Plan of Reorganization submitted in the Chapter 11 Case. "Maximum Rate" shall mean the maximum legal rate of interest in the State of New York or if no such rate then exists then of the highest lawful rate of interest permitted under such other applicable law of Bank's choice in effect on the date thereof. "Mortgage" shall mean any mortgage which is in compliance with all FNMA/FHLMC requirements and purchased pursuant to the Mortgage Warehouse Line. "Mortgage Warehouse Line" shall mean the Line extended to the Borrower by the Bank for the purpose of providing financing to the Borrower for the acquisition of individual consumer mortgage loans and immediate disposition into the secondary mortgage market. 3 "Note" means any Revolving Credit Note. "Person" shall mean an individual, partnership, subsidiary, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority, or other entity of whatever nature. "Plan" means an employee benefit plan maintained for employees of Borrower and subject to the provisions of ERISA. "Plan of Reorganization" means that certain first amended and restated plan of reorganization as such plan may be amended, submitted by the Borrower in the Chapter 11 Case. "Prime Rate" means the highest "rime rate" of interest, quoted from time to time, by The Wall Street Journal as the "base rate on corporate loans at large U.S. money center commercial banks," provided, however, that in the event that The Wall Street Journal ceases quoting a "prime rate" of the type described, "Prime Rate" shall mean the highest per annum rate of interest quoted as the "Bank Prime Loan" rate for "This week" in Statistical Release H. 15 (519) published from time to time by the Board of Governors of the Federal Reserve System. The "Prime Rate" shall change effective on the date of the publication of any change in the applicable index by which such "Prime Rate" is determined. "Prohibited Transaction" means any transaction set forth in ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time to time. "Qualified Investor" means any person or company that has been preapproved by the Bank to purchase a mortgage from a Bank pre-approved mortgage banking company. "Reportable Event" means any of the events set forth in Section 4042 of ERISA. "Revolving Credit Note" means the promissory note, dated of even date herewith, as amended or supplemented from time to time, in a principal amount equal to the maximum amount of the Revolving Line of Credit, evidencing Advances to be obtained by Borrower under the Revolving Line of Credit, together with any renewals or extensions thereof, in whole or in part. "Revolving Line of Credit" means that line of credit extended to Borrower pursuant to section 2 hereof. 4 "Subsidiary" means any corporation organized under the laws of any state of the United States or the District of Columbia and conducting all its business and having all its assets within the United States, all of whose outstanding stock of all classes (other than director's qualifying shares, if any) is at the time owned by the Borrower and/or one or more Subsidiaries. "Take-out" means the sale to a Qualified Investor pre-approved by the Bank of any Mortgage(s). "Tangible Net Worth" means the excess of total assets over total debt of Borrower determined on a consolidated basis, excluding, however, from the determination of total assets (i) all intangible assets, including, without limitation, goodwill (whether representing the excess cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs, research and product development costs and management contracts, (ii) treasury stock, (iii) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of stock, and (iv) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence and/or amortization of properties and all other reserves or appropriation of retained earnings which, in accordance with GAAP, should be established in connection with the business conducted by Borrower. "UCC" means the Uniform Commercial Code as in effect in the State of New York. 1.2 ACCOUNTING TERMS. All accounting terms whether or not specifically defined herein shall be construed in accordance with GAAP, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. SECTION 2 THE REVOLVING LINE OF CREDIT 2.1 THE REVOLVING LINE OF CREDIT. Subject to all of the terms and provisions of this Agreement, Bank agrees to make Advances to the Borrower from time to time during the period from the Effective Date up to but not exceeding more than thirty (30) days before the Maturity Date in an aggregate amount not to exceed at any one time outstanding, the principal amount of One Million Dollars ($1,000,000.00) for the first six (6) months of the term of the Line and to increase thereafter to Two Million Dollars ($2,000,000.00) provided there has been no Default. 5 Borrower may borrow, repay and reborrow under the Line so long as the unpaid principal balance does not exceed the maximum amount specified above. 2.2 ADVANCES. Advances granted by Bank to Borrower hereunder during the first six (6) months of the Line shall be evidenced by a promissory note in substantially the form attached hereto as Exhibit "A" with appropriate insertions (herein referred to as the "First Note") dated of even date herewith and maturing six months after the Effective Date on which date the full amount of principal and interest remaining unpaid on the Note shall be due and payable. If no Event of Default is then continuing, the Bank shall then renew the First Note upon the same terms and conditions for an additional nine month term. Advances granted by Bank to Borrower thereunder shall be evidenced by a promissory note in substantially the form attached hereto as Exhibits "B"and "C" (the "Second Notes" and "Consolidated Note" respectively) with appropriate insertions and maturing fifteen (15) months after the Effective Date on which date the full amount of principal and interest remaining unpaid on the Consolidated Note shall be due and payable. The First Note, Second Note and Consolidated Note shall bear interest from the date thereof on the outstanding unpaid principal balance thereof, from time to time, at a rate per annum, (computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed), equal to the Bank's Prime Rate in effect from time to time plus One percent ( 1 %) with any change in rate to be effective simultaneously with the corresponding change in the Bank's Prime Rate, payable monthly commencing the first day of the first month succeeding the Effective Date and continuing on the first day of each month thereafter until the Maturity Date on which date all remaining interest and principal due hereunder shall be due and payable. Should interest and/or principal not be paid when due, it/they shall thereafter bear interest at the Maximum Rate. The excess of Advances made by Bank over payments of principal shall be the outstanding principal balance of the Note from time to time and at any time. The books and records of Bank shall be evidence of any Advance, the outstanding principal balance of the Note, accrued interest on the Note, and any payment of principal or interest on the Note. The Borrower shall pay to the Bank a $.50 penalty fee for any Advance not paid on the Advance Maturity Date for such Advance unless, prior to said Date, a new Take-out commitment has been provided by the Borrower and approved by the Bank which extends the Advance Maturity Date. Any extension of time for payment of principal or of interest on the Note resulting from the due date falling on a day other than a Business Day shall be included in the computation of interest. 6 2.3 REQUEST FOR ADVANCE. Borrower shall furnish to Bank a written request for each Advance at least one ( 1 ) Business Day prior to the date of the proposed Advance, which request shall state the date and amount of the Advance requested from Bank and shall be accompanied by a Certificate of No Default in substantially the form attached hereto as Exhibit "D" and provided for in Section 3.2(b) hereof. If said request is by telephone, it must be from a pre-authorized officer of Borrower and it must be confirmed in writing by Borrower no later than twenty-four (24) hours thereafter. The Bank will make such Advance available to a preapproved title company in immediately available funds by crediting the amount thereof to the Borrower's account. Notwithstanding the foregoing, Borrower shall be liable for all Advances made by Bank pursuant to telephone request whether or not Borrower has confirmed same in writing. 2.4 PREPAYMENT OF THE NOTE. Borrower may at any time prepay the Notes or any of them, in full or in part, provided, however, that any prepayment of principal shall include accrued interest to the date of prepayment of the principal amount being prepaid. Any prepayment shall be applied first to satisfaction of any accrued and unpaid interest on the Note and the balance shall be against the principal balance thereof. 2.5 GRANT OF SECURITY INTEREST. For value received and as collateral security for the Line, Borrower hereby grants to Bank a security interest, lien and mortgage in and to, and agrees and acknowledges that Bank has, and shall continue to have, a security interest, lien and mortgage in and to, and assigns to Bank its rights in, and all of Borrower's power to transfer title to those assets and properties of Borrower of the types described below, wherever located, however arising or created, and whether now owned or existing or hereafter arising, created or acquired: (A) Each promissory note or other evidence of indebtedness ("Mortgage Note(s)") now held or hereafter assigned to or acquired by Borrower relating to any loan transferred to Bank under Section 3.3 of this Agreement and all instruments and other forms of payment, all general intangibles and accounts, and all proceeds thereunder and therefrom (excepting servicing rights with respect to the Mortgage Notes), and all books and records relating to any of the above; (B) All collateral, security, liens and security interests now or hereafter held for each such Mortgage Note, including without limitation, the beneficial interest in any related deed of trust or mortgage and all guarantees thereof; 7 (C) All present and future title insurance policies insuring any of the deeds of trust or mortgages issued in connection with any Mortgage Note; (D) All present and future commitments of a Qualified Investor to purchase a Mortgage Note or Mortgage Notes from Borrower as may be assigned; (E) All present and future rights of Borrower under contracts to service Mortgage Notes and related deeds of trust for its own account or for the account of third parties; (F) Any and all present and future money and deposit accounts and all other assets of Borrower in which Bank receives a security interest or which hereafter come into the possession, custody or control of Bank; (G) All proceeds, instruments, general intangibles, property, property rights, privileges and benefits arising out of, from the enforcement of, or in connection with, the collateral described in subparagraphs (A) through (F), above, {the "Collateral"); (H) All books, records, files, computer programs, data processing records, computer software, documents and other information, property, or general intangibles, at any time evidencing, describing, or pertaining to the Collateral described or referred to in subsections (A) through (G) above (the "Books and Records"); and (I) All products and proceeds (as defined in the UCC) of any of the Collateral described above in any form, and all proceeds of such proceeds, including, without limitation, all cash and credit balances, all payments under any indemnity, warranty or guaranty with respect to any of such property, all awards for taking by eminent domain, all proceeds of fire or other insurance, including any refunds of unearned premiums in connection with any cancellation, adjustment, or termination of any insurance policy, all proceeds obtained as a result of any legal action or proceeding with respect to any of such property, and claims by Borrower against third parties for loss or damage to, or destruction of, any of such property. 2.6 REPAYMENT OF THE NOTE. Each Qualified Investor shall sign a preapproved Bailee Flow Agreement acknowledging, inter alia, certain irrevocable instructions whereby the Qualified Investor shall agree that all payments shall be made directly to the Bank. 8 SECTION 3 CONDITIONS PRECEDENT TO CREDIT ADVANCE 3.1 INITIAL CREDIT ADVANCE. Bank's obligation to make the initial Advance hereunder is subject to the condition precedent that the Bank shall have received on or before the day of such Advance each of the following, in form and substance acceptable to the Bank: (a) Delivery of Documents. Bank shall have received all of the following in form and substance satisfactory to it: (1) Loan Documents. The Borrower's Note drawn to the order of Bank and any other documents evidencing the instant transaction that Bank reasonably requests. (2) Other Corporate Documents. Certified copies of those resolutions of the Board of Directors of Borrower approving and authorizing the execution, delivery and performance of this Agreement, the Note and all other documents provided for herein and all other actions to be taken by Borrower in connection herewith. (3) Commissioner of Corporations Consent. The written consent of the California Commissioner of Corporations to Borrower's pledge of Collateral to secure the Note. (4) Opinion of Counsel. The written opinion of counsel for Borrower, acceptable to Bank, in form and substance satisfactory to Bank, to the effect that: (i) Borrower is duly incorporated and organized, validly existing and in good standing under the laws of the State of New York without limitation on the duration of its existence and is duly licensed or qualified as a foreign corporation and is in good standing in the State of California and in all other jurisdictions wherein the character of the property owned or the nature of the business transacted makes such licensing or qualification necessary. (ii) Borrower is duly authorized under the law, its Articles of Incorporation, and its By-Laws to execute and carry out this Agreement, the Note, the pledge of Collateral to secure the Note and all other documents provided for herein; the same have been duly authorized by all necessary corporate action and either do not require the consent or approval of such governmental body, agency or authority or the prior consent or approval of any governmental 9 body, agency or authority has been obtained by Borrower; and this Agreement, the Note, the pledge of Collateral to secure the Note and all other documents provided for herein when executed and delivered for value received, will constitute the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally. (iii) There is no provision in Borrower's Articles of Incorporation, By-Laws or preferred stock, nor any indenture, contract or agreement to which Borrower is a party, nor any New York statute, rule or regulation binding on Borrower, nor any judgment, order or decree of any court or arbiter, which, to the knowledge of such counsel, would be contravened by the execution and delivery of this Agreement, the Note, the pledge of Collateral to secure the Note or any other documents provided for herein, or by the performance of any term, provision or covenant of Borrower contained herein or therein. (c) Accuracy of Representations and Warranties. The representations and warranties contained in Section 4 of this Agreement shall be true and correct on and as of the date of the initial Advance. (d) No Event of Default. No Default or Event of Default and no event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default shall have occurred and be continuing. (e) Approval of Bank Counsel. All legal matters incident to, or in connection with, the transactions hereby contemplated shall be reasonably satisfactory to counsel for Bank. (f) Evidence of Collateral. Bank shall have received the Collateral and all documents necessary to perfect its security interest therein in form and substance satisfactory to Bank in its sole discretion. (g) Confirmation of Plan of Reorganization. In addition to all other conditions herein referenced, the Credit Line shall not become operative until there is an entry of an order confirming Borrower's First Amended and Restated Plan of Reorganization, as such plan may be amended (the "Plan of Reorganization"), filed with the United States Bankruptcy Court for the Southern District of New York pursuant to applicable provisions of Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") with regard to that certain matter known as In re PIONEER COMMERCIAL FUNDING CORPORATION a/k/a PCFC of California, Chapter 11 Case No. 90 B 20085 (HS) filed in the United States Bankruptcy Court for the Southern District of New York and referred to hereinafter as the "Chapter 11 Case". 10 3.2 SUBSEQUENT ADVANCES. Bank's obligation to make any Advances other than the initial Advance hereunder shall be subject to the fulfillment of the following conditions precedent: (a) Bank shall have received a written request from Borrower as provided in Section 2.3 hereof; and (b) Bank shall have received a certificate dated the date of such credit extension, executed on behalf of Borrower by the President, Executive Vice President or the Vice President and Secretary of Borrower advising that: (i) The representations and warranties contained in Section 4 hereof are correct on and as of the date of such credit as though made on and as of such date, other than those which specifically refer to an earlier date; and (ii) No Default or Event of Default has occurred and is continuing, or would result from such credit extension, and no event has occurred which would constitute an Event of Default but for the requirement that notice be given or that time elapse, or both. (c) The Bank shall have received such other approvals, opinions, or documents as the Bank may reasonably request. 3.3 ALL ADVANCES. Prior to or concurrently with the Bank making any Advance hereunder, Borrower shall furnish to the Bank the following documents pursuant to the Mortgage Warehouse Line: (a) Mortgage application approved by the Bank. (b) A complete mortgage warehouse package, including but not limited to 1) a copy of the mortgage, 2) promissory note, 3) application, 4) audit report, and 5) appraisal, all in compliance with FNMA/FHLMC requirements, including, but not limited to, receipt by the Bank of the original promissory note, endorsed in blank, a preliminary title report acceptable to the Bank, issued by a title company that has been pre-approved by the Bank, and a corporate assignment from the Borrower to the Bank of the Deed of Trust for the respective mortgage (received by the Bank prior to disbursement). (c) Mortgages will be from a mortgage banking company that has been pre-approved by the Bank. (d) Mortgages will conform to pre-approved written criteria that may not be modified without the written consent of the Bank except that mortgages shall at all times comply with FNMA/FHLMC requirements. 11 (e) The Mortgage loan package(s) shall be received by the Bank no later than 10:30 a.m. The Bank shall notify the Borrower by 5:00 p.m. of that same business day whether the Mortgage funding requests have been accepted or declined for funding. (f) The Borrower shall pay to the Bank $50 plus out-of-pocket expenses incurred to cover examination of each Mortgage package reviewed. (g) The Borrower shall pay to the Bank $300 for each mortgage company submitted to the Bank for approval. SECTION 4 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that: 4.1 CORPORATE EXISTENCE. Borrower is a corporation duly organized and validly existing under the laws of New York, is in good standing therein, is duly licensed or qualified as a foreign corporation in the State of California and in all other jurisdictions wherein the character of the property owned or the nature of the business transacted by it makes licensing or qualification as a foreign corporation necessary and is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances or orders of public authorities to carry on its business in the places and in the manner presently conducted. Borrower has the corporate power to execute and deliver this Agreement, the Note, the pledge of Collateral to secure the Note and all other documents related hereto, to obtain credit hereunder, and to perform the terms and conditions hereof and thereof. 4.2 CORPORATE AUTHORIZATION. The execution, delivery and performance by Borrower of the Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of Borrower's shareholders; (ii) contravene Borrower's charter or bylaws; (iii) violate any provision of law, any effective Order in the Chapter 11 Case, rule, regulation (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System), order, writ, judgment, decree, injunction, determination, or award presently in effect having applicability to the Borrower; (iv) result in a breach of, or violation under any indenture, bank loan, credit agreement, lease, instrument or agreement to which Borrower is a party or to which any of Borrower's properties is subject; (v) result in, or require, the creation or imposition of any lien, upon or with respect to any of the properties now owned or hereafter acquired by the Borrower, other than liens granted to the Bank; or (vi) cause the 12 Borrower to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award or any such indenture, agreement, lease or instrument. 4.3 FINANCIAL STATEMENTS. Financial statements of Borrower for its most recent fiscal year, copies of which have heretofore been furnished to the Bank, are complete and accurately and fairly represent the financial condition of Borrower, the results of its operations and the transactions in its equity accounts as of the dates and for the periods referred to therein, and have been prepared in accordance with GAAP. There are no material liabilities, direct or indirect, fixed or contingent, of Borrower as of the date of such financial statements which are not reflected therein or in the notes thereto. There has been no material adverse change in the financial condition or operation of Borrower since the date of the balance sheet contained in such financial statements. 4.4 ASSETS. Borrower has good and marketable title to all property and assets reflected in the balance sheet referred to in Section 4.3 hereof, except property and assets sold or otherwise disposed of in the ordinary course of business subsequent to that date. There are no outstanding liens or encumbrances on any properties or assets of Borrower, nor are there any security agreements to which Borrower is a party, or title retention agreements, whether in the form of leases or otherwise, of any personal property other than those reflected in those financial statements referred to in Section 4.3 hereof or those permitted under Section 6.2. 4.5 LITIGATION. Other than the Chapter 11 Case there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower upon reasonable inquiry, threatened, against or affecting Borrower at law, in equity, or before or by any governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign which, if adversely determined, would have a material adverse effect on the business or condition, financial or otherwise, of Borrower and Borrower is not in default in any material respect with respect to any order, writ, injunction, ruling, determination or decree of any of the foregoing except as heretofore disclosed to the Bank in writing. 4.6 BURDENSOME PROVISIONS. Borrower is not a party to any indenture, agreement, instrument or lease, or subject to any charter, by-law, or other corporate restriction, or any law, rule, regulation, order, writ, judgment or injunction, having a material adverse effect on the business, operations, properties or assets of Borrower. 4.7 NO DEFAULT OF OTHER AGREEMENTS. Borrower is not in default in the performance, observance or fulfillment of any obligation, covenant or condition contained in any debenture, note or other evidence of indebtedness of Borrower or in any indenture or agreement of Borrower. 13 4.8 TAXES. Except as permitted pursuant to Section 5.6, Borrower has filed all tax returns (federal, state and local) which are required to be filed by Borrower and has paid or made adequate provision for the payment of all taxes which have or may become due pursuant to said returns and pursuant to any matters raised by audits or pursuant to any assessment received by Borrower or for other causes known to Borrower, including, but not limited to, interest and penalties, if any. 4.9 VALID AND BINDING OBLIGATIONS. This Agreement, the Note, the pledge of Collateral to secure the Note and all other documents related hereto when executed and delivered will constitute valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally. Borrower will duly and punctually pay the principal and interest payable under the Note according to the terms thereof and hereof. 4.10 REGULATION U. No part of the proceeds of Advances made hereunder will be used to purchase or carry any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock. Borrower is not engaged principally in or as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any such margin stock. If requested by Bank, Borrower will furnish Bank a statement in conformity with the requirements of Federal Reserve Form U-1. 4.11 ERISA. The Borrower is in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed, nor has any Plan been terminated; no circumstances exist which constitute grounds under Section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administrate, a Plan, nor has the PBGC instituted any such proceedings; the Borrower has not completely or partially withdrawn under Section 4201 or 4204 of ERISA from a Multi-employer Plan; the Borrower has met its minimum funding requirements under ERISA with respect to all of its Plans and the present value of all vested benefits under each Plan exceeds the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA and the regulations thereunder for calculating the potential liability of the Borrower to the PBGC or the Plan under Title IV of ERISA; and the Borrower has not incurred any liability to the PBGC under ERISA. 14 4.12 OPERATION OF BUSINESS. The Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted, and the Borrower is not in violation of any valid rights of others with respect to any of the foregoing. 4.13 NO MISREPRESENTATION. No information, material or data supplied to the Bank by the Borrower in connection with this Line includes any untrue statement of a material fact, nor is a material fact omitted. SECTION 5 AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as credit shall remain available hereunder, and until the full and final payment of any promissory note made in favor of the Bank, unless Bank waives compliance in writing: 5.1 FINANCIAL INFORMATION. Borrower will deliver to Bank: (a) Within ninety (90) days after the end of each of Borrower's fiscal years, complete copies of its audit report, which report shall include at least a balance sheet as of the close of each such fiscal year, a statement of income and retained earnings for each such fiscal year, and a statement of cash flow of Borrower for such fiscal year, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year, as at the end of said fiscal year, together with the report by a firm or firms of independent certified public accountants acceptable to Bank. Such financial statements shall be prepared in accordance with GAAP and shall fairly reflect the financial condition and operations of Borrower and shall be accompanied by a certificate of said accountants, certified to the Bank, to the effect that, in making the examination necessary for their audit of the financial affairs of Borrower for such fiscal year, nothing has come to their attention of any violation of any of the terms or provisions of this Agreement or of the occurrence of any condition, event or act which, with or without notice or lapse of time, or both, would constitute an Event of Default or, if such accountants shall have obtained knowledge of any such violation, condition, event or act, the nature and status thereof. (b) As soon as such statements are available, but not later than ninety (90) days after the end of each quarter, a copy of unaudited financial statements of Borrower, including its balance sheets as of the close of such quarter and its statement of income and retained earnings for such quarter and for that part of the fiscal year ending with the last day of such quarter, all in reasonable detail and 15 all certified to by the Borrower's chief financial officer as having been prepared in accordance with GAAP. Such financial statements shall be accompanied by a certificate of said officer stating that he has no knowledge that an Event of Default, or an event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if an Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which Borrower proposes to take with respect thereto. (c) Promptly, after sending or filing thereof, copies of any and all proxy statements, financial statements and reports, if any, which Borrower sends to its public stockholders and copies of all regular and periodic reports and all registration statements which Borrower files with the Securities and Exchange Commission; (d) The Bank and its agents shall have the right, both prior to closing and from time to time thereafter, at Borrower's expense, (i) to visit and inspect Borrower's business premises, and the premises where Borrower's assets and books and records are located and (ii) to conduct an audit of the books and records of Borrower. The results of any such visit and inspection or of any such audit shall be acceptable to the Bank in the Bank's sole discretion. So long as the Borrower is not in default, Borrower's expense for the Bank's audit shall be limited to $1,300.00 per annum. In the event that the Borrower is in default, then the Borrower shall be liable for all of the Bank's expenses incurred under this paragraph. (e) Such additional information as Bank may from time to time reasonably request with respect to the business affairs and financial condition of Borrower. 5.2 Management/Performance Reports. Borrower shall provide all internal reports within 10 days after the end of each month. These reports will consist of, but not be limited to, a: (a) trial balance segmented by mortgage company showing mortgagor's name; address; city; date that Borrower funded the mortgage company; amount of mortgage; amount advanced by Borrower; documentation fee; date of takeout commitment; and the name and address of the respective investor. (b) Commitment fail report segmented by mortgage company and containing all information referenced in 5.2 (a) herein. (c) Delinquency report referencing all mortgage companies that are 15 days or more past due in payment of interest. The report will indicate the date of 16 last contact; reason for tardiness; anticipated cure date; and what action has been taken to avoid reoccurrence. (d) Monthly trend reports of the prior 24 months of mortgage company activity and performance indicating: (i) the volume in both numbers and dollars and average dollars per mortgage; (ii) days late in payment of interest; (iii) those mortgages which were not taken out ("Commitment fails") as required; and (iv) the number of mortgages declined and their aggregate amount. 5.3 USE OF PROCEEDS OF THE REVOLVING CREDIT. Borrower will use the proceeds of the Advances made by Bank to Borrower to support Borrower's Mortgage Warehouse Line. 5.4 MAINTENANCE OF CORPORATE EXISTENCE. Borrower will remain in and continue to operate substantially the same line of business it is presently engaged in; maintain and preserve its corporate existence and all rights, privileges and franchises necessary or desirable in the conduct of its business; qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required; and, conduct its business in an orderly, efficient and customary manner. 5.5 MAINTENANCE OF PROPERTIES. Borrower will maintain, preserve and keep all properties and assets (tangible and intangible) necessary or useful in its business in good working order and condition, ordinary wear and tear excepted. 5.6 COMPLIANCE WITH LAWS. Borrower will comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including, but without limitation, any obligations imposed by ERISA, non-compliance with which could adversely affect its business or credit, except where contested in good faith and by appropriate proceedings. 5.7 TAXES AND CLAIMS. Borrower will pay and discharge promptly, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, prior to the date on which penalties attach thereto, and pay all lawful claims for labor, materials and supplies that, if unpaid, might become a lien or charge upon its property, provided that 17 Borrower shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith and by proper proceedings and if Borrower shall have set aside on its books and shall maintain adequate reserves for the payment of the same in conformity with GAAP. 5.8 INSURANCE. Borrower will obtain and maintain insurance with financially sound and reputable insurance companies or associations in such amounts and against such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, which insurance may provide for reasonable deductibility but in no event be less than the amount of the Line. Borrower shall furnish Bank on request full information as to the insurance maintained by Borrower. 5.9 NOTICE OF DEFAULTS. Borrower will give prompt written notice to Bank as soon as possible but in no event, within five (5) days, of any Event of Default or of any event of default under any other agreement or indenture entered into by Borrower or of any other matter which has resulted or might result in a material adverse change in the condition, financial or otherwise, or operations of Borrower. 5.10 CHANGES IN MANAGEMENT. Borrower will give prompt written notice to Bank of any changes in the senior management of Borrower. 5.11 NOTICE OF LITIGATION. Borrower will notify the Bank Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting the Borrower, which, if determined adversely to the Borrower, could have a material adverse effect on the financial condition of the Borrower. 5.12 RIGHT OF INSPECTION OF RECORDS. Borrower will keep and maintain full and accurate accounts and records of its operations according to GAAP and permit Bank and its designated officers, employees, agents and representatives, to have access to such accounts, records and operations and to make examinations thereof at all reasonable times. The Bank may discuss the affairs, finances and accounts of the Borrower with any of Borrower's employees, officers, directors and the Borrower's independent accountants. 5.13 EXECUTION OF OTHER DOCUMENTS. Borrower will do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all and every such further acts, covenants, assurances or further instruments and documents as Bank may reasonably request in order to carry out the intent and purpose hereof. 18 5.14 DEPOSITORY ACCOUNT. During the term hereof, Borrower will maintain a deposit or account with Bank. SECTION 6 NEGATIVE COVENANTS Borrower covenants and agrees that so long as the Bank has a Commitment to the Borrower hereunder, and until the full and final payment of the Note, unless Bank waives compliance in writing, Borrower will not: 6.1 CONSOLIDATION AND MERGER. Liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture, syndicate or other combination, except that Borrower may be consolidated with or merged with any other corporation, provided that in any such merger or consolidation. Borrower shall be the surviving or resulting corporation and immediately after the effectiveness of such merger or consolidation, there shall have occurred and be continuing no Default or Event of Default. 6.2 LIENS. Create, incur, assume, or suffer to exist any Lien upon or with respect to any of its properties, now owned or hereafter acquired, except: (1) Liens in favor of the Bank; (2) Liens for taxes or assessments or other government charges or levies if not yet due and payable; (3) Liens imposed by law, such as mechanics', materialmen's, landlords', warehousemen's, and carriers' Liens, and other similar liens, securing obligations incurred in the ordinary course of business which are not past due for more than thirty (30) days; (4) Liens, deposits, or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement) public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (5) Easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use, and enjoyment by the Borrower of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; and 19 (6) Liens (other than on the Collateral) to secure financing described in Section 6.03(4). 6.03 DEBT. Create, incur, assume, or suffer to exist, any Debt, except: (1) Debt of the Borrower under this Agreement or the Note; (2) Debt of the Borrower subordinated on terms satisfactory to the Bank to the Borrower's obligations under this Agreement and the Note; (3) Accounts payable to trade creditors for goods or services which are not aged more than ninety (90) days from the billing date and current operating liabilities (other than for borrowed money) which are not more than 90 days past due, in each case incurred in the ordinary course of business and paid within the specified time; and (4) Additional financing obtained by the Borrower in order to support its mortgage warehouse lending activity. 6.04 LEASES. Create, incur, assume, or suffer to exist, any obligation as lessee for the rental or hire of any real or personal property, except leases existing on the date of this Agreement and any extension or renewals thereof. 6.05 SALE AND LEASEBACK. Sell, transfer, or otherwise dispose of any real or personal property to any Person and thereafter directly or indirectly lease back the same or similar property. 6.06 DIVIDENDS. Declare or pay any dividends or purchase, redeem, retire, or otherwise acquire for value any of its capital stock now or hereafter outstanding; or make any distribution thereof to its stockholders as such whether in cash, assets, or obligations of the Borrower; or allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption, or retirement of, any shares of its capital stock; or make any other distribution by reduction of capital or otherwise in respect to any shares of its capital stock except that: (i) the Borrower may declare and deliver dividends and make distributions payable solely in common stock of the Borrower; and (ii) the Borrower may purchase or otherwise acquire shares of its capital stock by exchange for or out of the proceeds received from a substantially concurrent issue of new shares of its capital stock. 6.07 SALE OF ASSETS. Sell, lease, assign, transfer, or otherwise dispose of any of its now owned or hereafter acquired assets, receivables, and leasehold interest, except: (i) for inventory, including mortgages, disposed of in the ordinary 20 course of business; and (ii) the sale or other disposition of assets no longer used or useful in the conduct of its business. 6.08 INVESTMENTS. Make any loan or advance to any Person, (other than loans constituting a part of its mortgage warehouse lending activities) or purchase or otherwise acquire any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any Person except: (i) direct obligations of the United States or any agency thereof with maturities of one year or less from the date of acquisition; (ii) commercial paper of a domestic issue rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc.; {iii) certificates of deposit with maturities of one year or less from the date of acquisition issued by any FDIC insured bank in an amount less than One Hundred Thousand Dollars ($100,000.00); and (iv) for stock, obligations, or securities received in settlement of debts (created in the ordinary course of business) owing to the Borrower. 6.09 GUARANTIES. Assume, guarantee, endorse, or otherwise be or become directly or contingently responsible or liable (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods, or services, or to supply or advance any funds, assets, goods or to maintain or cause such Person to maintain a minimum working capital or net worth, or services or otherwise to assure the creditors of any Person against loss) for obligations of any Person, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of its mortgage warehouse lending business. 6.10 TRANSACTION WITH AFFILIATE. Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arm's length transaction with a Person not an Affiliate. 6.11 DEFAULT UNDER OTHER AGREEMENTS. Borrower will not commit or do, or fail to commit or do, any act or thing which would constitute a breach of, or default under, any of the terms or provisions of any other agreement or indenture, contract, document or instrument executed or to be executed by Borrower in connection with the borrowing of money and under which Borrower may be obligated as borrower or guarantor, if such breach or default consists of the failure to pay any indebtedness when due or if such breach or default caused the acceleration of any indebtedness or requires that any such indebtedness be paid prior to its stated maturity or due date or causes the termination of any commitment to lend. 21 SECTION 7 EVENTS OF DEFAULT 7.1 EVENTS OF DEFAULT. If any one or more of the following events (herein called "Events of Default") described herein shall occur for any reason whatsoever (and whether the occurrence shall be voluntary or involuntary or come about or to be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), then Borrower shall be in default: (a) Note. If Borrower shall default in the payment of principal of, or interest on, the Note when the same shall become due and payable; or (b) Misrepresentation. If any of the representations or warranties made herein or in any certificate or financial or other statement heretofore or hereafter furnished to Bank by or on behalf of Borrower in connection with this Agreement or the extension of any credit hereunder shall be false or misleading in any material respect at the time made; or (c) Covenants. If Borrower shall fail to perform or observe any other covenant, term, provision, condition, agreement or obligation of this Agreement and such failure to perform or observe has a material adverse effect on the collectability of the Advances; or (d) Other Debts. If Borrower shall fail to perform or observe any material covenant, term, provision, condition, agreement or obligation under any other agreement, indenture, document, note or other instrument (including, but not limited to the generality of the foregoing, other indebtedness owing to Bank) executed or to be executed by Borrower, which failure shall entitle the lender thereon to accelerate debt due under such agreement; or (e) Insolvency. If Borrower shall become insolvent; or admit in writing the inability to pay its debts as they mature; or fail generally to pay debts as they become due; or make an assignment for the benefit of creditors of commence a case for dissolution; or apply for or consent to the appointment of, or taking possession by a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) for the Borrower or for a substantial part of the property or business of the Borrower; or shall take any corporate action in furtherance of any of the foregoing; or (f) Appointment. If a trustee, liquidator, assignee, custodian, sequestrator or receiver (or similar official) shall be appointed for Borrower or for a substantial part of the property or business of Borrower without the consent of 22 Borrower and shall not be discharged within thirty (30) calendar days after such appointment; or (g) Custody. If any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of Borrower and shall not be dismissed within thirty (30) calendar days thereafter; or (h) Liens. If any money judgment, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of the properties or other assets of Borrower and shall remain unvacated, unbended, or unstayed for a period of fifteen (15) calendar days; or (i) Bankruptcy. If a bankruptcy, reorganization, insolvency, or liquidation case or other case for relief under any bankruptcy law or any law for the relief of debtors shall be commenced by or against Borrower and, if instituted against Borrower, shall not be dismissed within thirty (30) calendar days after such institution or Borrower shall by any action or answer approve of, consent to, or acquiesce in any such case or admit the material allegations of, or default in answering a petition filed in any such case; or (j) Suspension of Business. If Borrower shall voluntarily or involuntarily suspend the transaction of its business or a vital component of its business, as presently conducted, for more than five (5) consecutive Business Days; (k) Material Adverse Change. If there shall be any material adverse change from the present condition or affairs (financial or otherwise) of the Borrower that in the Bank's reasonable opinion impairs its security or increases its risk; or (l) Validity Contest. If this Agreement, the Note, or any other document related hereto shall, at any time while the Note shall remain unpaid, cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by Borrower or Borrower shall deny that it has any or further liability or obligation under this Agreement, the Note, or any other documents related hereto. SECTION 8 REMEDIES 8.1 REMEDIES. Upon the occurrence of any Event of Default or Default, Bank's obligation to disburse any undisbursed portion of the Line shall immediately cease; provided, however, that if such obligation has ceased due to the occurrence of 23 a Default or an Event of Default and such Default or Event of Default has been cured or waived, then such obligation shall be reinstated as of the date such Default or Event of Default is cured or waived. Upon the occurrence or existence of any Default or Event of Default or at any time thereafter so long as such Default or Event of Default is continuing, without prejudice to the rights of Bank to enforce its claim against Borrower for damages for failure by Borrower to fulfill any of its obligation hereunder or to bring suit against Borrower for specific performance of this Agreement, Bank shall have all of the rights and remedies described hereafter, inclusive, and it may exercise any one, more, or all of such remedies, in its sole discretion, without thereby waiving any of the others. (a) Acceleration of the Line. Bank, at its option, may declare the Line to be immediately due and payable, and in the event a voluntary or involuntary case is commenced under the Bankruptcy Code by or against Borrower as a debtor, the Line automatically will be due and payable without any notice or declaration by Bank, whereupon the same shall become immediately due and payable without presentment, demand, protest, notice of non-payment or any other notice required by law relative thereto, all of which are hereby expressly waived by Borrower, anything contained herein to the contrary notwithstanding and, in connection therewith, the rate of interest charged on the Note then outstanding shall automatically and without further notice increase to a rate per annum equal to the Maximum Rate. If any Note of Borrower to Bank, shall be a demand instrument however, the recitation of the right of Bank to declare any and all amounts outstanding to be immediately due and payable, whether such recitation is contained in such Note, or in this Agreement, as well as the recitation of the above events permitting Bank to declare all amounts outstanding due and payable, shall not constitute an election by Bank to waive its right to demand payment under a demand at any time in any event, as Bank in its discretion may deem appropriate. Thereafter, Bank, at its option, may, but shall not be obligated to, accept less than the entire amount due, if tendered, provided, however, that unless then agreed to in writing by Bank, no such acceptance shall be deemed to constitute a waiver of any Default or a reinstatement of any Commitment of Bank to Borrower hereunder. (b) Remedies of a Secured Party. Bank shall have the rights and remedies of a secured party under the UCC in effect on the date of the Event of Default or Default (regardless of whether the same has been enacted in the jurisdiction where the rights or remedies are asserted), including, without limitation, the right to take the Collateral or any portion thereof into its possession, by such means (without breach of the peace) and through agents or otherwise as it may elect (and, in connection therewith, demand that the Borrower assemble the Collateral at a place or places and in such manner as Bank shall prescribe), and sell, lease or otherwise dispose of the Collateral or any portion thereof in its then condition or following any commercially reasonably preparation or processing, which disposition may be by public or private proceedings, by one or more contracts, 24 as a unit or in parcels, at any time and place and on any terms, so long as the same are commercially reasonable. Bank may apply the proceeds of any such sale or disposition to any of the amounts due and owing under the Line in such order as Bank, in its sole discretion, may elect. Bank shall give Borrower written notice of the time and place of any public sale of the Collateral or the time after which any other intended disposition thereof is to be made, except where the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The requirement of sending reasonable notice shall be met if such notice is given to Borrower at least five (5) days before such disposition. Expenses of retaking, holding, insuring, preserving, protecting, preparing for sale or selling or the like with respect to the Collateral shall include, in any event, reasonable attorneys' fees and other legally recoverable collection expenses, all of which shall constitute the amount due and owing under the Line. For the purposes of the preceding paragraph, the Bank may, so far as the Borrower can give authority therefor, enter upon any or all of the premises where any of the Collateral or books or records may be situated and take possession and remove the same therefrom. (c) Sole Determination. The Bank shall have the right in its sole discretion to determine which rights, security liens, security interests or remedies it shall at any time pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of them or any of the Bank's rights hereunder. Any moneys, deposits, balances, or other property of Borrower which may come into the Bank's hands at any time or in any manner, may be retained by the Bank and applied to any of the indebtedness of Borrower to Bank. (d) Rights and Remedies Cumulative. No right or remedy herein conferred upon the Bank is intended to be exclusive of any other right or remedy contained herein or in any other instrument or document delivered in connection with or pursuant to this Agreement, and every such right or remedy shall be cumulative and shall be in addition to every other such right or remedy contained herein and therein or now or hereafter existing at law or in equity or by statute, or otherwise. (e) Rights and Remedies Not Waived. No course of dealing between the Borrower and the Bank or any failure or delay on the part of the Bank in exercising any rights or remedies hereunder shall operate as a waiver of any rights or remedies of the Bank and no single or partial exercise of any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder. 25 (f) Right of Setoff. Upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower) to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower against any and all the obligations of the Borrower now or hereafter existing under this Agreement or the Note or any other Loan Document, irrespective of whether or not the Bank shall have made any demand under this Agreement or the Note or such other Loan Document and although such obligations may be unmatured. The Bank agrees promptly to notify the Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Bank may have. (g) Cross Default. Upon the occurrence of an Event of Default under the terms and conditions of the Line, said Event of Default or Default shall also act as a default under the terms and conditions of any other loan made by Bank to Borrower and upon the occurrence of a default or event of default under the terms and conditions of any other loan made by Bank to Borrower, then such default or event of default shall also act as an Event of Default hereunder. Upon the happening of such event of default, or Event of Default, the entire principal balance under the terms of the Line, and/or any other outstanding loan, with all accrued interest thereon, shall become immediately due and payable in full. This provision shall apply to any future modifications, renewals and/or extensions hereof. SECTION 9 MISCELLANEOUS PROVISIONS 9.1 NOTICES. Any notices, payments, requests, reports information or demands which any party hereto may desire or may be required to give to any other party shall be given or made upon such other party either through deposit in the mails, by hand delivery or transmitted by facsimile (FAX) at its address as follows: Borrower: PIONEER COMMERCIAL FUNDING CORP. 2500 Camino Diablo, Suite 210 Walnut Creek, California 94596 FAX NO: (510) 256-0703 Attn: Ted Reingold, Executive Vice President 26 Bank: UMB BANK AND TRUST COMPANY 10 Rockefeller Plaza New York, NY 10021 FAX NO: (212) 459-0164 Attn: Christian M. Dahl, Vice President or as to each party, at such other address as shall be designated by such party in a written notice to such other party, complying as to delivery with the terms of this Section. All such notices, requests, demands, directions and other communications shall, when mailed, delivered or FAXed, be effective when deposited in the mails or FAXed, respectively, addressed as aforesaid, except that notices or requests to the Bank pursuant to Section 2.3 shall not be effective until received by Bank. 9.2 WAIVER. Neither the failure of, nor any delay on the part of any party hereto in exercising any right, power or privilege hereunder shall preclude other or further exercise thereof, or the exercise of any right, power or privilege; nor shall any waiver of any right, power, privilege or default hereunder constitute a waiver of any other right, power, privilege or default or constitute a waiver of any other default of the same or of any other term or provision. No amendment or waiver of any provision of this Agreement or the Note shall be effective unless contained in writing signed by Bank, and then such shall only be effective in the specific instance and for the specific purpose given. All rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law. 9.3 BANKER'S LIEN OR SET OFF. Nothing in this Agreement shall be deemed any waiver or prohibition of Bank's right of banker's lien or setoff. 9.4 EXPENSES OF BANK. The Borrower shall pay on demand all out-of-pocket costs and expenses incurred in connection with the filing and recording of the Loan Documents and Borrower shall also pay for all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of any of the Loan Documents and the other documents to be delivered under any such Loan Documents, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. 9.5 ASSIGNABILITY. This Agreement shall bind and the benefits thereof shall inure to, Borrower and Bank and their respective successors and assigns, as the case may be. Borrower may not assign this Agreement or any of the rights of Borrower hereunder without the prior written consent of Bank. 27 9.6 GOVERNING LAW. This Agreement, the Notes, and all other documents executed pursuant to the provisions hereof shall all be deemed entered into in the State of New York and shall be governed by and construed according to the laws of the State of New York without giving effect to its conflict of law principles. 9.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the matters herein contained and, as such, supersedes and cancels all prior understandings and agreements between the parties. 9.8 HEADINGS. The headings hereinabove set forth are solely for the purpose of identification and shall not be construed as a part of the paragraphs they head. 9.9 AMENDMENTS. No amendment, modification, termination or waiver of any provision of any Loan Document to which the Borrower is a party, nor consent to any departure by the Borrower from any Loan Document to which it is a party, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 9.10 SEVERABILITY OF PROVISIONS. Any provision of any Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. 9.11 NUMBER - GENDER. As used herein, the singular shall include the plural, the plural shall include the singular, and, masculine, feminine and neuter pronouns shall be fully interchangeable,where the context so requires. 9.12 INCORPORATION. This Agreement specifically incorporates all such terms and conditions contained in the Commitment letter executed by the parties. If there is any conflict between the Agreement and the Commitment, this Agreement shall be controlling. The Commitment shall be incorporated and become one of the Loan Documents. JURY TRIAL WAIVER BORROWER AND BANK HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREIN, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, AND ANY 28 AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS, (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EACH PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK IN ENTERING INTO THIS AGREEMENT. BORROWER FURTHER ACKNOWLEDGES THAT THIS JURY TRIAL WAIVER PROVISION HAS BEEN EXPLAINED TO IT BY ITS COUNSEL AND THAT IT UNDERSTANDS AND AGREES TO SAME. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto by their respective corporate officers thereunto duly authorized, all as of the date first hereinabove written. UMB BANK AND TRUST COMPANY PIONEER COMMERCIAL FUNDING CORPORATION _____________________________________ By:______________________________ CHRISTIAN M. DAHL, Vice President Title: _____________________________________ LILLY COHEN, Assistant Vice President 29 STATE OF NEW YORK COUNTY OF NEW YORK SWORN TO, SUBSCRIBED AND ACKNOWLEDGED before me this day of 199_, by ______________________ as___________________________ of PIONEER COMMERCIAL FUNDING CORP., a New York corporation, on behalf of said corporation. _________________________________ Notary Public, State of New York My Commission Expires: STATE OF NEW YORK COUNTY OF NEW YORK SWORN TO, SUBSCRIBED AND ACKNOWLEDGED before me this day of 199_, by CHRISTIAN M. DAHL as Vice President of UMB Bank and Trust Company, a New York chartered commercial bank, on behalf of said bank. ________________________________ Notary Public, State of New York My Commission Expires: STATE OF NEW YORK COUNTY OF NEW YORK SWORN TO, SUBSCRIBED AND ACKNOWLEDGED before me this day of , 199_, by LILLY COHEN as Assistant Vice President of ___________________________ corporation, on behalf of said corporation. __________________________________ Notary Public, State of New York My Commission Expires: [Letterhead of United Mizrahi Bank and Trust Company] February 21, 1996 Glenda S. Klein, Senior Vice President Pioneer Commercial Funding Corporation 6660 Reseda Blvd. Suite 108 Reseda, Ca. 91335 REFERENCE IS MADE TO THE REVOLVING LINE OF CREDIT AND SECURITY AGREEMENT DATED AS OF MAY 25, 1993 ("THE REVOLVER") BETWEEN UMB BANK AND TRUST COMPANY N/K/A UNITED MIZRAHI BANK AND TRUST COMPANY, "THE BANK" AND PIONEER COMMERCIAL FUNDING CORPORATION "PCFC". Dear Mrs. Klein: The Bank has agreed to amend Section 2.1 of the Revolver by increasing the principal amount of advances available by One million five hundred thousand dollars ($1,500,000.00) to an aggregate amount not to exceed four million dollars ($4,000,000.00). In consideration of the amendment, PCFC agrees to pay a facility fee of one percent (1%), per annum on the increased amount which is eight thousand ($8,000.00), which fee will be charged to PCFC's checking account upon receipt of the signed copy of this letter. Section 5.4 of the Revolver is hereby deleted. Section 5.4 will now state: Borrower will remain in and continue to operate solely in the business of warehousing of loans, which may include second mortgages and home improvement loans under FHA/VA/HUD guidelines, provided that such loans do not exceed borrowers thirty-five percent (35%) of borrower's capital; maintain and preserve its corporate existence and all rights, privileges and franchises necessary or desirable in the conduct of its business; qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required; and conduct its business in an orderly, efficient and customary manner. And PCFC also agrees, upon completion of its Initial Public Offering, ("I.P.O."), that it will issue to the Bank, Warrants for Common Stock, in an amount equal to four point nine percent (4.9%), of the common stock issued and outstanding at the time of the I.P.O. The exercise price of each warrant will be five dollars and fifty cents per share ($5.50). Each year after the first year, twenty-five percent (25%), of the warrants would be exercisable at the Bank's discretion, however, in the event that the four Page 2 of 2 million dollar commitment is reduced or terminated any unexercised warrants in the bank's possession would be reduced proportionately to the extent of the reduced commitment. All other terms and conditions of the Revolver shall remain in full force and effect and none of the terms of the Revolver are or shall be deemed to amended, modified or waived except by the express terms contained herein. Very truly yours, Lilly S. Cohen Assistant Vice President Christian M. Dahl Vice President Accepted and agreed to this day of February, 1996 Pioneer Commercial Funding Corporation By:________________________________________ Glenda Klein, Senior Vice President EX-10 11 EXHIBIT 10.2 EMPLOYMENT AGREEMENT Agreement dated as of the 1st day of April, 1995, between Pioneer Commercial Funding Corp., a New York Corporation (the "Company") and Glenda Klein (the "Executive"). W I T N E S S E T H WHEREAS, the Executive has heretofore served as the Senior Vice President and Chief Financial Officer of the Company; and WHEREAS, the Company desires to formalize the terms and conditions of the Executive's continued employment by the Company in the manner hereinbelow provided, NOW, THEREFORE, in consideration of the foregoing, and the mutual terms, covenants and conditions hereinbelow set forth, it is agreed, as follows: ARTICLE 1 Employment Section 1.1 Employment of the Executive. Commencing on the date first above-written (the "Commencement Date") and continuing through March 31, 1997, the Executive shall be engaged by the Company as Senior Vice President and Chief Financial Officer, reporting to the Chief Executive of the Company. During said period of employment, (a) the Executive shall devote substantially all of her time and efforts to the Company's business, provided, however, that the Executive may serve on a reasonable number of boards of directors, trade associations and public service organizations, committees and commissions; and (b) the Executive shall stand for election as a Director of the Company at the annual meetings of shareholders held throughout the term of her service under this Agreement. ARTICLE 2 Compensation; Benefits Section 2.1 Salary. In consideration of her services hereunder, the Executive shall receive a base salary payable at the rate of $90,000 per annum during the first year of the term of this Agreement, and $100,000 per annum during the second year of such term, subject to such increases, but not decreases therein, to be made from time to time during the term hereof as the Board of Directors, or the Compensation Committee thereof, may deem appropriate. The payment of such salary shall be made in twice monthly installments and shall be subject to all applicable withholding obligations imposed upon the Company by federal, state and local taxing authorities. The Board of Directors, or said Committee, may in its discretion approve one or more bonuses to the Executive based on performance or such other circumstances as the Board deems appropriate. Section 2.2 Stock Options. In order to stimulate the efforts of the Executive, strengthen her desire to remain with the Company and provide her with a more direct interest in its welfare by encouraging and enabling the Executive to acquire shares of the Company's $.01 par value common stock ("Common Stock"), the Company hereby agrees to grant to the Executive: (a) an option to purchase 100,000 shares of Common Stock during the five year period commencing on the Commencement Date at an exercise price of $5.00 per share; and (b) in the event that the Executive shall have been continuously employed by the Company during the period commencing on the Commencement Date and continuing through April 30, 1996, an option to purchase 50,000 shares of Common Stock during the five year period commencing on May 1, 1996 at an exercise price equal to the closing price of the Common Stock, as quoted on April 30, 1996 on the principal market on which such shares shall then be (or if no trading in the Common Stock shall have taken place on such date, then on the next preceding date on which such trading shall have occurred). If the Common Stock shall not then be registered under the Securities and Exchange Act of 1934 and publicly traded on the Nasdaq Stock Market or any other exchange, the exercise price for said option shall be determined by mutual agreement between the Company's Board of Directors and the Executive. (c) The above-described options shall not be "incentive stock options," as such term is used in Section 422A of the Internal Revenue Code of 1986, as amended. The option described in Section 2.2(a) hereof shall be fully vested on the Commencement Date, and shall be exercisable at any time during the term thereof, regardless of the Executive's employment status with the Company on the date or dates of exercise thereof. The option described in Section 2.2(b) hereof shall be fully vested on May 1, 1996, and shall be exercisable at any time during the term thereof, regardless of the Executive's employment status with the Company on the date or dates of exercise thereof. All of the rights and obligations of the Company and the Executive with respect to the issuance of shares of the Common Stock underlying each of said options shall be, as set forth in the form of option annexed hereto as Exhibit A. Section 2.3 Employee Benefits. The Company will provide the Executive and her spouse during the term of this Agreement with health insurance coverage (medical and vision) commensurate with the coverages presently provided to the Executive through the plan currently in effect between the Company and Kaiser Permanente/Kaiser Foundation Health Plan, Inc. 2 Section 2.4 Vacation. The Executive shall be entitled to three weeks of paid vacation during each year of the term of this Agreement. The Executive shall coordinate her vacation plans so that she and the Company's Chief Executive shall not be away from the Company at the same time. Section 2.5 Executive Benefits. (a) Life Insurance. The Company shall also acquire, continue, renew and/or replace, as necessary, and shall pay all premiums due and owing with respect to, one or more policies insuring the life of the Executive in the aggregate amount of $750,000 during the first year of the term of this Agreement, and $1,000,000 during the second year of such term. The proceeds of such insurance shall be payable to the Executive's chosen beneficiary pursuant to, and in satisfaction of the Company's obligations under, Section 5.3 hereof. (b) Leased Automobile. In consideration of the Executive's relinquishment of her right to take 11 weeks of accrued vacation, and in lieu of her receipt of payment for such benefit, the Company shall lease an automobile for the Executive's exclusive use during the term of this Agreement. The obligation under such lease to be paid by the Company shall not exceed $800.00 per month, provided, however, that the Company shall be responsible for payment for the insurance and maintenance of, and the consumption of fuel by, the automobile. Section 2.6 Expense Reimbursement. The Company shall pay or reimburse the Executive for all reasonable expenses actually incurred by her in performing the services to be rendered by her hereunder. Such payment/reimbursement shall be made within a reasonably prompt time in accordance with, and upon the Executive's compliance with, the Company's then pertaining expense reimbursement policies and procedures. ARTICLE 3 Proprietary Information Section 3.1 Definitions. For purposes of this Agreement, the following definitions shall apply: (a) "Trade Secrets" shall mean all Software, documentation, know-how, and information relating to the past, present, or future business of the Company or any plans therefor, or relating to the past, present, or future business of a third party or plans therefor which are disclosed to the Company, which the Company does not disclose to third parties without restrictions on use or further disclosure; provided, however, Trade Secrets shall not include the general knowledge and experience of the Executive obtained during the employment of the 3 Executive by the Company. (b) "Proprietary Information" shall mean Trade Secrets, and any and all processes, methods, techniques, projects, developments, plans, research data, financial data, personnel data, customer lists and supplier lists created by or for the Company which is maintained in confidentiality and disclosed only to other executives or employees of the Company on a need to know basis. (c) "Software" shall mean each of one or more standard computer programs created in whole or in part by the Company and/or its executives and employees or by anyone else as an "employee for hire" of the Company (which each may consist of one or more modules or sub-programs), together with the media upon which it resides, and all accompanying standard documentation pertaining thereto, as well as all "derivative works" thereof, i.e., any source code, object code, software instruction or set of software instructions, or documentation, in human readable or machine readable form, which is in whole or in part based upon, or derived from, Software. Section 3.2 The Executive's Obligations Concerning Trade Secrets. (a) During the term of this Agreement and at all times thereafter, the Executive shall treat Trade Secrets on a confidential basis and not disclose them to others without the prior written permission of the Company, or use them for any purpose other than for the performance of services for the Company. (b) Trade Secrets are the Company's sole and exclusive property and the Executive shall surrender to the Company possession of all Trade Secrets in her possession upon any suspension or termination of her employment. If after the suspension or termination of the Executive's employment hereunder, she becomes aware of any Trade Secrets in her possession, she shall promptly surrender possession thereof to the Company. Section 3.3 The Executive's Obligations Applicable to All Proprietary Information. (a) During the term of this Agreement and at all times thereafter, the Executive shall not disclose any Proprietary Information to others outside the Company or use the same for any unauthorized purposes without written approval by the Board of Directors of the Company, unless and until such Proprietary Information has become public knowledge other than through its unauthorized dissemination by the Executive. 4 (b) The Executive agrees that all files, letters, memoranda, reports, records, data, sketches, drawings, notebooks, program Software diagrams, documentation, schematics and printouts in any tangible media including, but not limited to, paper, photographs, computer disks and tapes and other forms of human-readable and machine-readable media, containing Proprietary Information, whether created by the Executive or others, which shall come into the Executive's custody or possession, shall be and are the exclusive property of the Company to be used by the Executive only in the performance of her duties for the Company. All such tangible media or copies thereof and all other tangible property of the Company in the Executive's custody or possession shall be delivered to the Company, upon the earlier of (i) a request by the Company or (ii) termination of the Executive's employment. After such delivery, the Executive shall not retain any such tangible media or copies thereof or any such other tangible property. (c) The Executive agrees that her obligation not to disclose or to use information, know-how and records of the types set forth in Sections 3.3(a) and (b) above, and her obligation to return tangible media and other tangible property, set forth in Section 3.3(b) above, also extends to such types of information, know-how, records and tangible property of customers of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Executive in the course of the Company's business. (d) The Executive shall provide the Company with all information, documentation and assistance that it may request to perfect, enforce, or defend the proprietary rights in or based on Trade Secrets. The Company, in its sole discretion, shall determine the extent of the proprietary rights, if any, to be protected. All such information, documentation and assistance shall be provided at reasonable compensation to the Executive, if provided after any suspension or termination of the Executive's employment. ARTICLE 4 Competitive Activities Section 4.1 During the term of her employment hereunder, the Executive shall not: (a) Perform any services, directly or indirectly, for any person or entity competing, directly or indirectly, with the Company; (b) Own, directly or indirectly, an interest (other than a common stock ownership interest of not more than 5% of a corporation listed on a national securities exchange or 5 traded through NASDAQ) in any entity competing, directly or indirectly, with the Company; and (c) Compete, directly or indirectly, with any products or services marketed or offered by the Company. Section 4.2 During the one year period after any suspension or termination of the Executive's employment with the Company, the Executive shall not contact, directly or indirectly, any of the Company's customers with whom she had contact during the last year of her employment hereunder for the purpose of soliciting business. ARTICLE 5 Termination of Agreement Section 5.1 Events of Termination. The employment of the Executive shall terminate prior to the end of the term of this Agreement under any of the following circumstances. (a) The death of the Executive. (b) In the event that the Executive shall substantially fail to perform her duties hereunder due to illness or other incapacity, and if such illness or other incapacity shall continue for a period of six months, the Company shall have the right, by notice sent to the Executive at her residence of record with the Company, to terminate the Executive's employment hereunder as of a date (not less than four months after the date of the sending of such notice) to be specified in such notice. (c) In the event of gross malfeasance, gross misconduct or a felony conviction of the Executive, or for other similar good cause materially detrimental to the Company, as determined by a court of competent jurisdiction, the Company shall have the right, by notice thereof sent to the Executive at her residence of record with the Company, to terminate the Executive's employment hereunder "for cause" as of a date specified in such notice. (d) In the event that the Executive resigns as the Company's Senior Vice President and Chief Financial Officer. (e) In the event that (i) a majority of the Company's outstanding Common Stock is acquired by a third party; (ii) substantially all of the Company's assets are acquired by a third party; or (iii) the Company is merged with and into another entity, and in either of such events, such third party or entity or the Executive elects to terminate her employment hereunder. Section 5.2 The Executive's Entitlements Upon 6 Termination - General. (a) Except to the extent specifically provided for herein, the Executive shall not be entitled to receive any severance pay or other form of compensation upon termination of her employment hereunder. (b) In the event that the Executive's employment hereunder shall terminate pursuant to any of the provisions of Section 5.1 hereof, the Executive (or her estate in the event of her death) shall be entitled to receive all unpaid Compensation1 and bonuses which shall have accrued through the date of termination. Section 5.3 The Executive's Entitlements Upon Termination - Death. In the event of termination of this Agreement due to the Executive's death, the sole obligation which the Company shall owe to the Executive's estate (or any other beneficiary of the Executive's choosing) shall be to pay or cause to be paid the insurance benefits described in Section 2.5(a) hereof. Section 5.4 The Executive's Entitlements Upon Termination Illness or Incapacity. In the event of termination of this Agreement due to illness or other incapacity, the Executive shall also receive severance pay equal to one year's salary payable in the amount equivalent to her annual salary at the time when the Company shall have sent to the Executive the notice specified in Section 5.1(b) hereof. Unless otherwise agreed by the Company, such severance shall be paid in the same manner as the Executive's salary would have been paid to her during the course of the applicable period of time. Section 5.5 The Executive's Entitlements Upon Termination Change of Control. In the event that the Executive's employment shall terminate pursuant to any of the provisions of Section 5.1(e) hereof, the Executive shall be entitled to receive, in lieu of any benefit or provision made pursuant to any other section or subsection of this Agreement: (a) all salary which otherwise would be due to her during the remainder of the term of this Agreement pursuant to Section 2.1 hereof, payable in the manner provided in such section; (b) all - -------- (1) i.e., the aggregate amount reportable by the Company on the Executive's IRS W-2 form with respect to the salary and employee and executive benefits which he would have received through the date on which termination or death occurs, including all sums payable to the Executive for accrued but unused vacation time, less all payments made during such year to him or for his benefit pursuant to Section 2.1 hereof. 7 benefits which otherwise would be due to her during the remainder of the term of this Agreement pursuant to Sections 2.3 and 2.5 hereof, to be provided in the manners provided in such sections; and (c) the sum of $100,000 which shall be payable in a lump sum (less required tax withholdings) not later than 30 days after the date of such termination. The provisions of this Section 5.5 shall survive the termination of this Agreement, and shall be binding upon any third party or entity which acquires a majority of the Company's outstanding Common Stock or substantially all of its assets, or which is the surviving constituent of a merger with the Company. ARTICLE 6 Indemnification Section 6.1 The Executive's Entitlements. Subject to any limitations imposed by applicable law, the Certificate of Incorporation and/or Bylaws of the Company, and until such time as the Company shall enter into a separate indemnification agreement with the Executive, the Company will indemnify and defend the Executive hereunder to the fullest extent permitted by applicable law with respect to all claims for compensatory damages (but not punitive damages or the expenses incurred by the Executive in defending against such claims) alleged against the Executive in any action, suit or proceeding commenced against her by reason of her status as a present or former officer, director or employee of the Company, or any subsidiary or affiliate of the Company, including actions brought by or in the right of the Company to procure a judgment in its favor. The provisions of this Article shall survive the termination of this Agreement. ARTICLE 7 Litigation Expenses Section 7.1 Payment by the Company. In the event the Executive becomes a party to any litigation regarding any matter pertaining to this Agreement, or any act of commission or omission alleged to have been made by the Executive while employed by the Company, including actions brought by or in the right of the Company to procure a judgment in its favor (each of which shall hereinafter be referred to as a "Covered Proceeding"), the Executive shall have the right to have her expenses, including, but not limited to all of her legal fees in prosecuting or defending such proceeding, paid by the Company as such expenses are incurred during the course of such Covered Proceeding. This right shall be in addition to any other rights of indemnification the Executive may have under the Certificate of Incorporation or Bylaws of the Company, or pursuant to any Indemnity Agreement or to applicable law. The provisions of this Article shall survive the termination of this Agreement. 8 Section 7.2 Decision by the Company Not to Pay Expenses in Advance. Anything herein or elsewhere contained to the contrary notwithstanding, in the event that the Board of Directors determines in good faith, after reviewing the facts available to it at the time of commencement of a Covered Proceeding, that (a) there is a substantial likelihood that the claims alleged against the Executive will be sustained on the merits; (b) the facts underlying such claims would support a termination of this Agreement for cause pursuant to Section 5.1(c) hereof; and (c) it would not, under such circumstances, be in the best interest of the Company to pay the expenses incurred by the Executive including, but not limited to all of her legal fees in prosecuting or defending such proceeding, as such expenses are incurred, the Company shall give notice in writing to the Executive of its determination and the facts upon which the same shall be based (a "Determination"). In such event, unless and until the court having jurisdiction over the Covered Proceeding (or another court of competent jurisdiction), after reviewing the relevant facts and the reasons upon which the Determination has been based, orders the Company to undertake to pay the Executive's expenses, as the same are incurred, the provisions of Section 7.1 hereof shall not be deemed to apply to such Covered Proceeding. ARTICLE 8 Miscellaneous Section 8.1 Assignability. This Agreement shall not be assignable by the Executive. This Agreement shall not be assignable by the Company without the prior written consent of the Executive except to a corporation which is the surviving entity in any merger involving the Company, or to a corporation which acquires all or substantially all of the stock or assets of the Company. Section 8.2 Notices. All notices, advices, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given to made on the next business day if delivered by facsimile transmission, overnight courier or Express Mail, or on the tenth business day after being mailed by first class, certified mail, postage prepaid, and properly addressed as follows: To the Company at: c/o Manhattan Associates 150 East 52nd Street New York, New York 10022 Attention: Mr. Arthur H. Goldberg To the Executive at: 9 20542 San Jose Street Chatsworth, California 91311 or to such other address as either party may designate by notice given in accordance with this Article. Section 8.3 Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successor and assigns. Section 8.4 Entire Agreement; Modification Waiver. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained herein and supersedes all prior and contemporaneous agreements, representations and understandings of the parties. No termination, modification or amendment of this Agreement shall be binding, unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Section 8.5 Sections Headings. The section headings of this Agreement are included for convenience only and shall not affect in any way the construction of interpretation of any of the provisions hereof. Section 8.6 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to its conflict of laws principles. 10 Section 8.7 Severability. In the event that any one or more of the provisions contained in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Agreement shall not be in any way impaired. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Pioneer Commercial Funding Corp. By:________________________________ Arthur H. Goldberg, Chairman and Chief Executive _________________________________ Glenda Klein EX-10 12 EXHIBIT 10.3 STOCK PURCHASE AGREEMENT AGREEMENT dated as of December 23, 1996, by and between Pioneer Commercial Funding Corp. ("Pioneer"), a New York corporation having an office at 6660 Reseda Boulevard, Reseda, California 91335 and Trans Lending Corporation, (the "Corporation"), a Delaware corporation having an office at 5081 North Dixie Highway, Boca Raton, Florida 33431. WHEREAS, Pioneer desires to purchase from the Corporation, pursuant to the terms, and subject to the conditions hereinafter set forth, 500 shares of the Corporation's Common Stock, par value $1.00 per share (the "Common Stock") and 200 shares of the Corporation's non-voting, non-dividend paying preferred stock, par value $1,000 per share (the "Preferred Stock"); and WHEREAS, Pioneer and the Corporation desire to set forth agreements concerning the manner in which the business of the Corporation will be managed after Pioneer acquires such securities from the Corporation, NOW, THEREFORE, in consideration of the premises and the mutual terms, covenants and conditions hereinafter set forth, it is hereby agreed as follows: ARTICLE 1 PURCHASE OF THE SECURITIES BY PIONEER Section 1.1 Purchase of Securities. At the Closing to be held on the Closing Date, Pioneer shall purchase from the Corporation 500 shares of Common Stock (the "Common Shares") and 200 shares of Preferrred Stock (the "Preferred Shares") in consideration for the payment to the Corporation of the sum of $300,000 to be made by wire transfer to an account designated by the Corporation, or by good, unendorsed certified check payable to the order of the Corporation. ARTICLE 2 REPRESENTATIONS OF THE PARTIES Section 2.1 The Corporation's Representations. (a) The Corporation (i) has been duly organized and is validly existing as a corporation in good standing under the laws of the state of Delaware, (ii) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (iii) has all requisite corporate power and authority and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters) to own or lease its properties and conduct its business. (b) The Corporation is not a party to or bound by any instrument, agreement or other arrangement (other than this Agreement) providing for it to issue any capital stock, rights, warrants, options or other securities. Immediately prior to the Closing there shall be issued and outstanding 500 shares of Common Stockand none of the shares of Preferred Stock. (c) Schedule A annexed hereto contains monthly cash flow projections prepared by the Corporation with respect to its proposed operations during the period from December 1996 - December 1997 (the "Projections"). The Projections were prepared by the Corporation's management with all due diligence based upon such management's experience and knowledge of the business of assembling, packaging and selling automotive financing contracts to institutional purchasers thereof. In accordance with the Projections, it is anticipated that the Corporation will generate a cumulative loss from operations of approximately $68,400 during the period December 1996 - February 1997, and will thereafter generate positive cash flows from its operations. (d) Kenneth Germain ("Germain"), the President of the Corporation, has in excess of 15 years of experience in the automotive financing business. (e) The Corporation has entered into agreements with the companies identified on Schedule B annexed hereto, pursuant to which the Corporation has been appointed to represent such companies in their respective capacities as purchasers of automobile financing paper. (f) At or prior to the Closing, the Corporation shall enter into an employment agreement with Germain containing such terms and conditions as shall be acceptable to the Chief Executive Officer of Pioneer. Section 2.2 Pioneer's Representations. (a) Pioneer is acquiring the Common Shares and the Preferred Shares solely for its own account. (b) Pioneer is an "accredited investor" (as that term is defined in rule 501 of Regulation D under the Securities Act of 1933, as amended (the "Act")). 2 Pioneer acknowledges that it has been given the opportunity to ask questions and receive satisfactory answers concerning this Agreement, the operations and financial condition of the Corporation, and the accuracy of the information provided by the Corporation to Pioneer. (c) Pioneer has no intention of distributing or reselling the Common Shares, the Preferred Shares or any part thereof, or interest therein, in any transaction which would be in violation of the securities laws of the United States of America or any state securities laws. (d) Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Act, the certificates evidencing Pioneer's ownership of the Common Shares and the Preferred Shares (and all securities issued in exchange therefor or substitution thereof) shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR SUCH LAWS." ARTICLE 3 CLOSING Section 3.1 Date, Time and Place of Closing. The closing of the sale of the Common Shares and Preferred Shares by the Corporation to Pioneer (the "Closing") shall take place on December , 1996 (the "Closing Date") at 10:30 A.M. New York time, at the offices of the Corporation, or on such other date, and at such other time and place as the parties may mutually agree upon. Section 3.2 Conditions Precedent to Closing. At or prior to the Closing, as conditions precedent to each party's obligation to consummate the transactions contemplated hereby: (a) Pioneer shall deliver to the Corporation a Secretary's Certificate attesting to the passage and continuing effect of resolutions by the Board of Directors of Pioneer authorizing Pioneer to execute this Agreement and consummate the 3 transactions contemplated hereby. (b) The Corporation shall deliver to Pioneer: (i) a good standing certificate issued by the Delaware Department of State not earlier than 30 days prior to the Closing; and (ii) a Secretary's Certificate attesting to the passage and continuing effect of resolutions by the Board of Directors of the Corporation authorizing the Corporation to execute this Agreement and consummate the transactions contemplated hereby. (c) The Corporation and Germain shall execute the employment agreement described in Section 4.2 hereof. (d) Germain and Pioneer shall execute that certain Non-Compete Agreement of even date herewith. (e) Alan Mann ("Mann") shall deliver to Germain an irrevocable proxy authorizing Germain to vote all 250 shares of the Corporation's Common Stock owned by Mann on any question coming before the Corporation's stockholders at any meeting of stockholders or pursuant to any written consent of the stockholders exeuted in lieu of a meeting. Such irrevocable proxy shall remain in full force and effect on December 17, 1999 or on the date when Germain shall sell, transfer (other than to immediate members of his family), assign, pledge, hypotheccate or otherwise dispose of any of the shares of the Corporation's Common Stock owned by him, whichever shall first occur. Section 3.3 Deliveries to be Made at the Closing. At the Closing: (a) Pioneer shall deliver to the Corporation payment of the funds specified in Section 1.1 hereof in the manner provided therein. (b) The Corporation shall deliver to Pioneer: (i) a share certificate evidencing Pioneer's ownership of 500 fully paid and nonassessable shares of Common Stock; and (ii) a share certificate evidencing Pioneer's ownership of 200 fully paid and nonassessable shares of Preferred Stock. ARTICLE 4 4 CONTROL; MANAGEMENT; OFFICER COMPENSATION Section 4.1 Control. As long as Pioneer shall be a holder of Common Stock: (a) The Board of Directors of the Corporation shall consist of three members. (b) The Corporation shall cause all of the shareholders of the Corporation other than Pioneer to vote all of their respective shares of Common Stock in favor of the election of Arthur H. Goldberg ("Goldberg"), Elie Housman ("Housman") and Germain as directors of the Corporation. (c) Pioneer shall vote all of its respective shares of Common Stock in favor of the election of Goldberg, Housman and Germain as directors of the Corporation. (d) Pioneer shall cause Goldberg and Housman to vote in favor of the appointment of Germain to serve as President of the Corporation. Section 4.2 Compensation to be Paid to Germain. Commencing on the day immediately following the Closing, and continuing until such time as the Corporation's Board of Directors may decide otherwise, Germain shall receive an annual base salary, in his capacity as President of the Corporation, in the amount of $96,000, payable at the rate of $8,000 per month. Germain's total compensation including his annual base salary, bonuses, dividends and other distributions with respect to profits and all other compensatory payments of every nature and description shall be in such amounts, and shall be paid as such times as the Board shall determine. The rights, duties and obligations of Germain and the Corporation in r espect of Germain's employment are set forth in a written employment agreement between such parties of even date herewith. Section 4.3 Control of Corporation's Operating Bank Account. The Corporation shall maintain an operating bank account in such bank as the Board of Directors shall determine. No checks drawn on such account, and no withdrawals from said account, in excess of $1,500.00, shall be valid and binding upon the Corporation unless effected by authority of Germain and either Goldberg or Housman, in their respective capacities as officers of the Corporation. ARTICLE 5 REDEMPTION OF PREFERRED SHARES 5 Section 6.1 Pioneer's Option. In the event that the cumulative loss from operations generated by the Corporation at any time after the Closing equals or exceeds the sum of $100,000, Pioneer shall thereupon have the option to sell all of the Preferred Shares to the Corporation for the sum of $200,000 (the "Option"). Such Option shall be exercisable at any time during the six month period following Pioneer's receipt of financial statements from the Corporation or its independent accountants evidencing the Corporation's cumulative loss from operations in an amount equal to or in excess of $100,000. Pioneer's exercise of such Option must be evidenced by a written notice thereof sent to the Corporation. The Corporation shall purchase all of the Preferred Shares at a closing to be held not more than 30 days after its receipt of such notice. At such Option closing, upon receipt of the certificates evidencing Pioneer's ownership of all of the Preferred Shares accompanied by a stock power executed in blank, payment of said purchase price shall be made by wire transfer to an account designated by Pioneer, or by delivery of a good, unendorsed certified or bank check payable to Pioneer's order. ARTICLE 6 MISCELLANEOUS PROVISIONS Section 6.1 Endorsement on Share Certificate. The certificate or certificates evidencing the shares of Common Stock and Preferred Stock issued by the Corporation to any of the parties hereto shall, in addition to any other legend required by law , have endorsed upon the face thereof the following legend: "THIS SHARE CERTIFICATE IS HELD SUBJECT TO THE TERMS OF AN AGREEMENT DATED AS OF DECEMBER 18, 1996 MADE BY TRANS LENDING CORPORATION AND PIONEER COMMERCIAL FUNDING CORP., A COPY OF WHICH IS ON FILE AT THE OFFICE OF THIS CORPORATION." Section 6.2 Term of Agreement. This Agreement shall remain in force until terminated in writing by all of the shareholders then holding shares in the Corporation, or upon the occurrence of any of the following events: (a) the bankruptcy, receivership or dissolution of the Corporation; or (b) the effectuation of an assignment for the benefit of the Corporation's creditors. Section 6.3 Notices. All notices, offers, acceptances, waivers and other 6 communications to any party under this Agreement shall be in writing and shall be deemed to have been sufficiently given on the date of delivery thereof if sent by hand, guaranteed overnight courier or facsimile transmission, or if mailed, first class postage prepaid certified mail with return receipt requested, to such addressee at its or his respective address first above written, or to such other address as such addressee, by notice to all other parties given in accordance with this section, may designate from time to time. Section 6.4 Number and Gender. Wherever and whenever the context of any provision of this Agreement so requires, the employment of a particular gender term shall be deemed to include such other gender term as may be required, and the use of a singular term shall be deemed to include the plural of same and vice-versa, as the case may be. Section 6.5 Benefit. This Agreement shall be binding upon and, subject to the terms hereof, shall operate for the benefit of the parties and their respective, successors and assigns. Section 6.6 Modification and Amendment. This Agreement shall not be modified or amended unless such modification or Amendment is evidenced by a writing executed by all of the shareholders then holding shares in the Corporation. This Agreement supersedes all other agreements and understandings heretofore or now existing between the parties hereto. Section 6.7 Counterparts. This Agreement may be executed in several counterparts, each of which when so executed and delivered, shall be considered an original Agreement, but all of which together shall constitute but one instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Pioneer Commercial Funding Corp. By:______________________________________ Arthur H. Goldberg, Chief Executive Officer Trans Lending Corporation By:______________________________________ Kenneth Germain, President 7 EX-10 13 EXHIBIT 10-4 NON-COMPETE AGREEMENT NON-COMPETE AGREEMENT dated as of December 23, 1996, between Pioneer Commercial Funding Corp. (the "Company"), a New York corporation having an office at 6660 Reseda Boulevard, Reseda, California 91335, and Kenneth Germain, having an office at 5081 North Dixie Highway, Boca Raton, Florida 33431 (the "Stockholder"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company is acquiring (the "Acquisition") a 50% common stock ownership interest in Trans Lending Corporation, a Delaware corporation ("Trans Lending"); and WHEREAS, the Acquisition is being made pursuant to the Stock Purchase Agreement dated as of December 23, 1996, between the Company and Trans Lending (the "Stock Purchase Agreement"); and WHEREAS, immediately prior to the Acquisition, the Stockholder will own a 50% common stock ownership interest in Trans Lending, and immediately after the Acquisition, the Stockholder will own a 25% common stock ownership interest in Trans Lending; and WHEREAS, this Agreement is being entered into pursuant to the Stock Purchase Agreement in connection with the Acquisition, and the execution and delivery of this Agreement is a condition precedent to the consummation of the Acquisition, NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. Covenant Not to Compete. (a) In order to induce the Company to consummate the Acquisition, and in consideration therefor, the Stockholder hereby covenants and agrees that, subject to the time limitations set forth in paragraph 1(b) below, the Stockholder, will not, directly or indirectly, during the term of this Agreement, for himself, or as agent of or on behalf of, or in conjunction with, any person, firm, corporation or other entity (other than on behalf of Trans Lending), (i) engage or participate in or become employed by or render advisory or other services, directly or indirectly, to or for any person, firm, corporation, partnership, joint venture or other entity which is principally engaged in the businesses of purchasing purchasing used vehicle loans made to, or used vehicle leases made with, individuals who are deemed to be relatively high credit risks ("non-prime credit individuals") by the new and/or used vehicle dealerships (the "Suppliers") who make such loans and leases available for purchase by Trans Lending or its Customers (as such term is hereinafter defined), and/or representing in any capacity any of the customers of Trans Lending, i.e., the banks, insurance companies, stock brokerage firms and other financial institutions and other entities (all of whom are collectively referred to as "Customers") in connection with such Customers' purchases of used vehicle loans made to, or used vehicle leases made with, non-prime credit individuals (any of the above-described activities being hereinafter referred to as a "Competitive Business"), (ii) invest or otherwise have an interest in or become interested in, as a principal, partner, officer, director, Stockholder, agent, joint venturer, creditor, guarantor, surety, investor or otherwise, any such person, firm, corporation, partnership, joint venture or other entity principally engaged in a Competitive Business, or (iii) take any action with respect to the Customers who purchase used vehicle loans made to, or used vehicle leases made with, non-prime credit individuals, and the Suppliers who provide such loans and leases to Trans Lending which can reasonably be expected to adversely affect the relationship of Trans Lending with any of such Customers or Suppliers. (b) The provisions of paragraph 1(a) above shall be subject to the following time limitations: (i) In the event of a Termination for Cause (as defined in the Employment Agreement dated as of December 23, 1996, between Trans Lending and the Stockholder (the "Employment Agreement")), for a three (3) year period commencing on the date of termination of the Stockholder's employment with Trans Lending (the "Termination Date"); (ii) In the event of a Voluntary Termination (as defined in the Employment Agreement), for a three (3) year period commencing on the Termination Date; (iii) In the event of a Termination Without Cause (as defined in the Employment Agreement) (as used herein, such term shall not include the non-renewal or expiration of the Employment Agreement), for a two (2) year period commencing on the Termination Date; or (iv) In the event of the non-renewal or expiration of the Employment Agreement, for a one (1) year period commencing on the expiration of the Employment Agreement; provided, however, the provisions of paragraph 1(a) hereof shall not be enforceable 2 against the Stockholder unless the Company or Trans Lending shall continue to pay the Stockholder the the Stockholder's Gross Compensation(1) during whichever of the foregoing periods of time may be applicable. (c) The limitations imposed upon the Stockholder pursuant to paragraph 1(a) hereof shall be applicable in Dade and Broward Counties in the State of Florida, New York County in the State of New York, Los Angeles County in the State of California, and at the specific street addresses located elsewhere in the United States whereat Trans Lending's Customers and Suppliers are located. (d) Notwithstanding anything to the contrary contained herein, the Stockholder may own up to 1% of the capital stock of any entity engaged in any Competitive Business that is publicly traded on a U.S. national stock exchange or quotation system (provided that the Stockholder does not control, directly or indirectly, through one or more entities or groups (whether formal or informal), the voting or disposition of greater than 1% of the aggregate beneficial ownership interest of any such entity). (e) The Stockholder understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of Trans Lending, but he nevertheless believes that he has received and will receive sufficient consideration and other benefits pursuant to this Agreement and the Stock Purchase Agreement and the agreements executed in connection therewith to clearly justify such restrictions which, in any event (given his education, skills and ability), the Stockholder does not believe would prevent him from earning a living. 2. Non-Solicitation. For a period commencing on the date hereof through and including the third anniversary of the termination or expiration of the Stockholder's employment with Trans Lending (the "Non-Solicitation Period"), the Stockholder shall not: (a) directly or indirectly, in one or a series of transactions, recruit, solicit or otherwise induce or influence any corporation, partnership, joint venture or other entity or enterprise, proprietor, partner, Stockholder, lender, director, officer, employee, consultant, sales agent, joint venturer, investor, lessor, client (including any prospective client), customer, supplier, agent, representative or any - --------- 1 Gross Compensation shall mean the aggregate of (i) the annual base salary which was being paid to the Stockholder immediately prior to the termination of his employment; and (ii) all bonuses which had accrued to the Stockholder (whether paid or unpaid) between January 1 of the year in which his employment shall have terminated and the date immediately preceding such termination. 3 other person which has a business relationship with Trans Lending at any time during the Non-Solicitation Period, to discontinue, reduce or modify such employment, agency or business relationship with Trans Lending; or (b) employ or seek to employ or cause any business to employ any person who at any time during the Non-Solicitation Period is or was employed or retained by Trans Lending. 3. Confidential Information. The Stockholder acknowledges that Trans Lending would be irreparably damaged if any confidential or proprietary information relating to Trans Lending or the Company or any of their respective business activities were disclosed to or utilized on behalf of others in a Competitive Business. Accordingly, except as required by law or in any litigation or similar proceeding (in which event, the Stockholder shall provide the Company with prompt notice of such requirement prior to making any such disclosure, so that the Company may seek an appropriate protective order, or otherwise cooperate with the Company in making such disclosure), the Stockholder shall not disclose and shall keep confidential any non-public or proprietary information relating to Trans Lending or the Company or any of their respective businesses to any person or entity, nor shall he make use of any such confidential or proprietary information for the benefit of any person or entity involved in a Competitive Business. For the purpose of this Section, the term "confidential or proprietary information" means all information which is known to the Stockholder and relates to Trans Lending or the Company or any of their respective businesses and their respective trade secrets, books and records, financial information and condition, suppliers, customers, marketing and pricing information, and all other non-public information relating to Trans Lending or the Company or any of their respective businesses. 4. Severability; Extraordinary Relief: Damages. (a) It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to reduce the scope of the portion thus adjudicated to be invalid or unenforceable or delete such portion from such provision, such reduction or deletion to apply only with respect to the operation of such provision of this Agreement in the particular jurisdiction in which such adjudication is made and enforced thereafter. (b) The Stockholder acknowledges and understands that the provisions of this Agreement are of a special and unique nature, the loss of which cannot adequately be compensated for in damages by an action at law and that the breach of the provisions of this Agreement would cause Trans Lending or the 4 Company irreparable harm. In the event of a breach or threatened breach by the Stockholder of any provision of this Agreement, Trans Lending or the Company shall be entitled to an injunction restraining him from such actual or threatened breach. Nothing contained herein shall be construed as prohibiting Trans Lending or the Company from pursuing any other remedies (including, without limitation, an action for damages) available for such actual or threatened breach of this Agreement, and the pursuit of an injunction or any other remedy shall not be deemed to be an exclusive election of such remedy. The Stockholder shall reimburse Trans Lending or the Company for all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the enforcement of this Agreement. 5. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the subject matter contained in this Agreement and supersede all prior agreements or understandings with respect thereto. 6. Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7. Notices. All notices, claims, requests, demands and other communication hereunder shall be in writing and sent by facsimile transmission or by a nationally-recognized overnight courier, delivered personally, or mailed (by registered or certified mail, return receipt requested and postage prepaid) as follows: if to the Stockholder, to: Kenneth Germain 2190 Sunderland Avenue Wellington, Florida 33414 Fax. No. 561-[ ] with a copy to: David J. Bartone, Esq. 1450 G Street, N.W. Washington, D.C. 20005-5717 Fax No. 202-824-8133 if to the Company, to: Pioneer Commercial Funding Corp. 6660 Reseda Boulevard Reseda, California 91335 5 Fax: (818) 776-0056 Attention: Arthur H. Goldberg with a copy to: Hall Dickler Kent Friedman & Wood LLP 909 Third Avenue, 27th Floor New York, New York 10022 Fax: (212) 935-3121 Attention: Steven D. Dreyer or to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a), in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, (c) in the case of international overnight courier, upon receipt of confirmation of delivery, (d) in the case of telecopy transmission, when received and (e) in the case of mailing, on the third business day following posting. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of New York, without giving effect to principles governing conflicts of laws. 9. Benefits of Agreement: Assignment. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties and its heirs, personal representatives, executors, successors and permitted assigns. This Agreement shall not be assignable by the Stockholder without the consent of the Company. The provisions of this Agreement shall inure to the benefit of each affiliate and subsidiary of the Company and each successor of the Company, whether by merger, consolidation, transfer of all or substantially all of its assets or otherwise. 10. Modification. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by each party. 11. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be an original instrument, but all such counterparts together shall constitute but one agreement. 6 12. Waivers. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. IN WITNESS WHEREOF, the parties have duly executed this Agreement the date first written above. PIONEER COMMERCIAL FUNDING CORP. By:_______________________________________ Arthur H. Goldberg, Chairman and Chief Executive ________________________________________ Kenneth Germain -----END PRIVACY-ENHANCED MESSAGE-----